Savage Industries, Inc. v. Utah State Tax Com'n

Decision Date03 May 1991
Docket NumberNo. 900248,900248
Citation811 P.2d 664
PartiesSAVAGE INDUSTRIES, INC., Petitioner, v. UTAH STATE TAX COMMISSION, Respondent.
CourtUtah Supreme Court

R. Brent Jenkins, Dale R. Kent, Salt Lake City, for petitioner.

R. Paul Van Dam and Mark E. Wainwright, Salt Lake City, for respondent.

HALL, Chief Justice:

Savage Industries, Inc., seeks a writ of review of a final order of the Utah State Tax Commission ("the Commission") entered on April 20, 1990, which denied Savage Industries' petition for redetermination and upheld the finding of the auditing division that subsidiary corporations of Savage Industries were not entitled to carry over their own preacquisition losses in determining their annual income for preparation of the consolidated returns of Savage Industries.

The facts in the case have been stipulated to by the parties and are supplemented by findings of the Commission in its redetermination hearing. Prior to April 1, 1982, Kenneth Savage, T. Luke Savage, and Neal Savage owned the majority of the stock of fourteen different operating corporations. On April 1, 1982, a stock holding and management corporation, Savage Western Industries Corporation ("Savage Western"), was formed to consolidate the corporations into a manageable structure. On April 1, 1982, the stock of Savage Western was entirely owned by the three brothers and members of their families. On November 28, 1984, Savage Western underwent a statutory merger with Savage Industries, Inc., and Savage Western changed its name to Savage Industries, Inc. On December 31, 1986, shares of Savage Industries stock were transferred between the brothers to give each brother an equal percentage of ownership after the settlement of divorces.

Prior to April 1, 1982, the stock of KNT Leasing Corporation ("KNT") was owned by the brothers, with each owning 33 1/3 percent of the stock. On April 1, 1982, Savage Western acquired 86.7 percent (2,600 shares) of the stock of KNT in exchange for its own stock. The remaining 13.3 percent (400 shares) was retained by Neal Savage pending divorce settlements. Prior to its acquisition by Savage Western, KNT filed separate Utah corporate franchise tax returns. In order to conform its tax year to that of Savage Western, KNT filed a separate corporate franchise tax return for the partial tax year June 1, 1981, to March 31, 1982. The return reported a current year's loss of $74,641 and reported $61,252 of prior years' losses as being available for carryover. On November 15, 1984, the name of KNT was changed to Savage Transportation Corporation. On January 15, 1985, the remaining 400 shares of Savage Transportation were acquired by Savage Industries. On March 30, 1987, Savage Transportation was merged with Savage Industries.

Prior to April 1, 1983, the shares of Western Rock Products Corporation ("Western Rock") were owned by Kenneth Savage, T. Luke Savage, Charles Blackburn, and Eldon Reese. On April 1, 1983, Savage Western acquired the shares of Kenneth Savage and T. Luke Savage, for a total of 81 percent ownership of Western Rock. During the next two years, the shares owned by Blackburn and Reese were redeemed, giving Savage Western 100 percent ownership in Western Rock. For periods of time prior to the April 1, 1983 acquisition by Savage Western, Western Rock filed separate corporate franchise tax returns. In order to conform its tax year to that of Savage Western, Western Rock filed a separate corporate franchise tax return for the partial tax year January 1, 1983, to March 31, 1983. The return reported a current year's loss of $648,291. Western Rock's separate return loss was first carried back to prior Western Rock separate returns, where $359,685 (as determined by Commission adjustment) was applied to offset income, thus leaving $288,606 of the loss available to be carried forward.

Starting with the fiscal year ending March 31, 1983, Savage Western, and later Savage Industries, joined with its subsidiaries in filing a Utah consolidated corporate franchise tax return. 1 In August of 1987, Savage Industries filed amended consolidated franchise tax returns for the years ended March 31, 1983, 1984, 1985, and 1986 to correct errors made on previously filed returns. In its amended consolidated return for the fiscal year ending March 31, 1983, Savage Western carried over $26,770 of KNT's separate return loss and applied it to offset KNT's income on the consolidated return. In its amended consolidated return for the fiscal year ending March 31, 1985, Savage Industries carried over $290,332 of Western Rock's separate return loss and applied it to offset Western Rock's income on the consolidated return. KNT's net operating loss was used to offset income generated by KNT. Western Rock's net operating loss was used to offset income generated by Western Rock. Neither net operating loss was used to offset the income of any other member of Savage Industries' consolidated group.

In November of 1987, the auditing division began examining these amended returns and, in an audit report dated February 2, 1988, disallowed carryovers of the losses on the consolidated returns. Savage Industries petitioned the auditing division for a reconsideration of its decision. On March 21, 1988, the auditing division responded to Savage Industries' petition and reiterated its position.

On April 5, 1988, Savage Industries filed a request for hearing before the Commission in order to orally present arguments prior to the Commission's rendering a final decision on its petition for redetermination. Oral argument was made before the Utah State Tax Commission on August 17, 1989. The Commission found in favor of the auditing division and against Savage Industries.

I. STANDARD OF REVIEW

Our first task in this case is to determine the appropriate standard of review of the Commission's decision. The Commission's decision to deny Savage's petition for redetermination was based on its interpretation of Utah Code Ann. § 59-7-108. In its conclusions of law, the Commission stated that Savage's interpretation of this section was incorrect and that the plain language of the statute prohibited the deductions sought by Savage. The Commission's decision was therefore based purely on its construction and interpretation of the legislative enactment and is purely a question of law.

In determining the standard of review of agency decisions, the Utah courts have consistently followed three basic standards of review, which were set forth in the case of Utah Department of Administrative Services v. Public Service Commission. 2 In that case, Justice Oaks, writing for a unanimous court, held that review of administrative decisions fell into three distinct categories which required differing standards of judicial deference to be given to the agency's decision. First, agency determinations of basic fact were to be given great weight and would only be overturned if they were not supported by any evidence of substance whatsoever. 3 Second, agency determinations of general law, including interpretation of the state and federal constitutions and of acts of Congress and of the Utah Legislature, were to be reviewed giving no deference to the agency's decision, but reviewing it for correctness. 4 Third, in between these two standards, agency decisions involving mixed questions of law and fact or the application of specific factual situations to the legislative enactments under which the agency operates were to be given deference by the courts and were to be upheld so long as they fell within the bounds of reasonableness and rationality. 5

Subsequent to Department of Administrative Services, a large body of case law has evolved applying and refining the scope of the three standards. 6 Review of agency determinations of fact has remained consistent, with courts upholding agency findings of fact if they were based upon any evidence of substance. 7 Review of agency determinations of law, however, has been less clear under Department of Administrative Services. 8 This is especially so in cases distinguishing between agency decisions which were granted deference by the courts and those reviewed for correctness. Recent decisions of this court have addressed this distinction and have clarified which agency decisions are granted deferential review and which fit within the "general law" category, to be reviewed using a correction of error standard.

In Hurley v. Board of Review of Industrial Commission, 9 this court attempted to clarify the distinction between cases requiring deference to agency decisions and cases which would be reviewed using a correction of error standard. In distinguishing the two standards, we noted that agency decisions which are granted a more deferential review are often mixed questions of law and fact, which require application of specific technical fact situations to the statutes which an agency is empowered to administer. These are the types of decisions and applications in which the agency's special expertise puts it in a better position than an appellate court to evaluate the circumstances of the case in light of the agency mission. In contrast, decisions involving statutory interpretation, issues of basic legislative intent, or construction of ordinary terms in the organic statute of an agency involve areas in which an appellate court is as well suited to decide the legal questions as is the agency. In cases where the basic question is what does the law require? the standard is a correction of error standard. 10

In Chris & Dicks v. Tax Commission, 11 we reiterated that correction of error is the basic standard of review of agency decisions of law. We stated:

In the usual case, questions of statutory construction are matters of law for the courts, and we rely on a "correction of error" standard of review, according no deference to the agency's interpretation. There are a limited number of circumstances where the agency's interpretation of a statute or...

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