Richards v. Idaho State Tax Com'n

• Decision Date: 09 June 1998
• Docket Number: No. 23749,23749
• Citation: 959 P.2d 457,131 Idaho 476
• Parties: John M. and Joy E. RICHARDS, Plaintiffs-Appellants, v. IDAHO STATE TAX COMMISSION, Defendant-Respondent. Boise, December 1997 Term
• Court: Idaho Supreme Court

Page 457

959 P.2d 457

131 Idaho 476

John M. and Joy E. RICHARDS, Plaintiffs-Appellants, v. IDAHO STATE TAX COMMISSION, Defendant-Respondent.

No. 23749.

Supreme Court of Idaho,

Boise, December 1997 Term.

June 9, 1998.

Green Law Offices, Boise; and Lukins & Annis, Coeur d'Alene, for appellants. Michael M. Megaard argued.

Alan G. Lance, Attorney General; Charles E. Zalesky, Deputy Attorney General, Boise, for respondent. Charles E. Zalesky argued.

SCHROEDER, Justice.

This is an appeal by John and Joy Richards from the district court's grant of summary judgment in favor of the Idaho State Tax Commission (the Commission). After auditing the Richards' Idaho tax returns, the Commission issued two notices of deficiency. The Commission concluded that the interest income that the Richards received from a shareholder's loan made by them to Idaho Forest Industries (IFI) was Idaho source income that should have been included on their income tax returns for 1989 and 1990. The Richards appealed the Commission's findings to the district court. The district court granted summary judgment in favor of the Commission.

I. FACTS AND PROCEDURAL BACKGROUND

The Richards are residents of California and own a home in Hayden Lake, Idaho. During 1989 and 1990 they filed both California resident individual tax returns and Idaho non-resident tax returns. At the time, John Richards was a shareholder in IFI, which was, and is incorporated under the laws of the State of Idaho. IFI filed its federal income tax returns under subchapter S of the Internal Revenue Code. During 1989 and 1990 John Richards owned 29.9540% of the outstanding shares of IFI.

Mr. Richards loaned money to IFI. The proceeds of these loans became part of IFI's working capital and were used to finance the purchase of log inventories and to provide cash to carry the company's lumber inventories and customer accounts. In 1989 the Richards received $108,634 in interest income from the loans to IFI. In 1990 the Richards received $68,485 in interest income. None of this interest income was reported by the Richards as Idaho source income on their 1989 and 1990 Idaho non-resident income tax returns.

Following an audit of the Richards' 1989 and 1990 Idaho non-resident income tax returns, the Commission adjusted the tax returns to include all of the interest income received from the loans made to IFI. On petition for redetermination the Commission modified the amount of interest income reported as Idaho source income by multiplying the interest income by the applicable Idaho apportionment factor. IFI reported an Idaho apportionment figure of 87.1500% on its 1989 income tax return and an apportionment figure of 89.7159% on its 1990 income tax return. The Idaho apportionment figure represents the percentage of business activity conducted in Idaho. Thus, under the apportionment method, 87.1500% of the interest income received in 1989 was treated as income from an Idaho source, and 89.7159% of the interest income received in 1990 was treated as income from an Idaho source.

The Richards contend that they are not subject to the Idaho non-resident income tax because: (1) the interest income was not from an Idaho source, and (2) pursuant to section 63-3024 of the Idaho Code (I.C.) and Idaho Income Tax Regulation 27A.1, non-residents who do not have a business situs in Idaho are not required to pay income taxes on interest income derived from sources within Idaho.

II.

STANDARD OF REVIEW

On appeal from a summary judgment order this Court applies the same standard of review as that used by the district court when originally ruling on the motion. Avila v. Wahlquist, 126 Idaho 745, 747, 890 P.2d 331, 333 (1995); Farm Credit Bank of Spokane v. Stevenson, 125 Idaho 270, 272, 869 P.2d 1365, 1367 (1994). The Court must liberally construe the facts in the existing record in favor of the non-moving party and draw all reasonable inferences from the record in favor of the non-moving party. Avila, 126 Idaho at 747, 890 P.2d at 333; Bonz v. Sudweeks, 119 Idaho 539, 541, 808 P.2d 876, 878 (1991). Summary judgment is appropriate if " 'the pleadings, depositions, and admissions on file, together with the affidavits,

if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.' " McCoy v. Lyons, 120 Idaho 765, 769, 820 P.2d 360, 364 (1991) (quoting I.R.C.P. 56(c)). If there are conflicting inferences contained in the record or reasonable minds might reach different conclusions, summary judgment must be denied. Bonz, 119 Idaho at 541, 808 P.2d at 878.

III.

THE INTEREST INCOME DERIVED FROM A LOAN MADE BY THE RICHARDS TO A CORPORATION IN WHICH THEY ARE SHAREHOLDERS CONSTITUTES INCOME DERIVED FROM SOURCES WITHIN THE STATE OF IDAHO.

During the years at issue, I.C. § 63-3024 stated:

A tax is hereby imposed for each taxable year commencing on and after January 1, 1987, upon every resident individual, trust or estate which shall be measured by his or its taxable income, and upon that part of the taxable income of any nonresident individual, trust or estate derived from sources within the state of Idaho....

I.C. § 63-3024 (1988) (emphasis added). Under this code section a non-resident individual must pay income tax on income derived from Idaho sources. The Richards are non-resident individuals, but they contend that the interest income from IFI is not from an Idaho source. The question then is whether interest income derived from a loan made by the Richards to a corporation in which they are shareholders constitutes income derived from sources within this state.

During the years at issue in this dispute, the Idaho Income Tax Act did not define the term "sources." The Idaho Supreme Court has defined the term "source" to include dividend income received from a corporation to the extent that the corporation's business took place in Idaho. Futura Corp. v. State Tax Comm'n, 92 Idaho 288, 442 P.2d 174 (1968). The Court stated:

[I]t is our opinion that the word "sources" when used in statutes dealing with sources of income derived from within this state--specifically, dividend income from a non-qualifying corporation--has reference not to the location of the entities issuing or receiving such dividend income, but rather to the location of the business activities wherein these earnings were derived.

Id. at 290, 442 P.2d at 176. The Court further agreed with the Missouri Supreme Court which held that " 'in the case of income derived from the use of capital, it is the place where the capital is employed.' " Id. (quoting In Union Electric Co.'s Petition, 349 Mo. 73, 161 S.W.2d 968, 970 (1942)). Therefore, the source of income from capital is the place where the capital is employed. The proceeds of the loan made by the Richards to IFI were used by the corporation as capital to finance its business operations. Applying the Futura definition of source of income from capital, the interest income received by the Richards in 1989 and 1990 was derived from an Idaho source to the extent that IFI used the capital in the state of Idaho. ¹

The Richards argue that the Futura definition of source does not apply to this case because Futura dealt with corporate income tax rather than non-resident individual income tax. However, Futura speaks more broadly, encompassing non-resident individuals also:

[I]t is our opinion that the word "sources" when used in statutes dealing with sources of income derived from within this state--specifically, dividend income from a non-qualifying corporation--has reference not to the location of the entities issuing or receiving such dividend income, but rather to the location of the business activities wherein these earnings were derived.

Id. (emphasis added).

There is further evidence that the Futura Court intended its definition to apply to nonresident individuals. The statutory language

                that the   Futura Court interpreted applied to both corporations and non-resident persons.  The statute at issue provided
                

63-3027. COMPUTING TAXABLE INCOME OF NON-RESIDENT PERSONS AND ANY CORPORATIONS.--

(a) In computing the taxable income of a non-resident person * * * with business situs in this state or any corporation with a business situs in this state * * *, income realized from or derived from sources within this state *includes....

1961 Idaho Sess. Laws Ch. 328, p. 628 (emphasis added). Based on the foregoing, the interest income from IFI was Idaho source income.

IV.

DURING THE YEARS AT ISSUE, IDAHO HAD NOT ADOPTED THE COMMON LAW DOCTRINE OF MOBILIA SEQUUNTUR PERSONAM.

The Richards also argue that the interest income from IFI is not from an Idaho source because of the common law doctrine of mobilia sequuntur personam. Under this doctrine income from intangible property, including interest and dividends, ordinarily follows a person and has its taxable situs at the domicile of the owner. Kopp v. Baird, 79 Idaho 152, 313 P.2d 319 (1957). The Richards contend that Kopp supports its position that the mobilia doctrine was followed in Idaho during the years at issue. In Kopp the Court stated: "The doctrine of mobilia sequuntur personam generally applies, for purposes of taxation, to intangible personal property. Such personal property ordinarily follows the person and has its taxable situs at the domicile of the owner." Id. at 164, 313 P.2d at 326.

However, Kopp involved an excise tax levied from an oil and gas lease on property located in Wyoming. Based on the outcome of the case and the manner in which it was discussed, it is not clear whether the Court intended to adopt the mobilia doctrine.

While Kopp has never been expressly overruled, its reference to the mobilia doctrine has not survived subsequent case law and legislative enactments. See TTX v. Idaho State Tax Comm'n, 128 Idaho 483, 485, 915 P.2d 713, 715 (1996); Futura, 92 Idaho at 288, 442 P.2d at 174. As discussed above, under Futura, the source of income...