Schlumberger Technology Corp. v. Dubno

• Decision Date: 03 March 1987
• Citation: 521 A.2d 569,202 Conn. 412
• Court: Connecticut Supreme Court
• Parties: SCHLUMBERGER TECHNOLOGY CORPORATION v. Orest T. DUBNO, Commissioner of Revenue Services.

Page 569

521 A.2d 569

202 Conn. 412

SCHLUMBERGER TECHNOLOGY CORPORATION v. Orest T. DUBNO, Commissioner of Revenue Services.

Supreme Court of Connecticut.

Argued Dec. 2, 1986.

Decided March 3, 1987.

Richard K. Greenberg, Asst. Atty. Gen., with whom were Anne M. Dufour, Asst. Atty. Gen., and on brief, Joseph I. Lieberman, Atty. Gen., for appellant-appellee (defendant).

Maurice T. FitzMaurice, with whom, on brief, were John M. Horak and Lawrence H. Lissitzyn, Hartford, for appellee-appellant (plaintiff).

Before PETERS, C.J., and ARTHUR H. HEALEY, DANNEHY, SANTANIELLO and CALLAHAN, JJ.

PETERS, Chief Justice.

This case involves a dispute about the proper measure of a multistate corporation's liability for the Connecticut corporation business tax. The plaintiff, Schlumberger Technology Corporation, appealed to the Superior Court, pursuant to General Statutes § 12-237, ¹ from a decision of the defendant commissioner of revenue services determining that the plaintiff's taxable income should be apportioned to Connecticut in accordance with the provisions of General Statutes § 12-218(b). ² The trial court sustained the plaintiff's appeal, and remanded the case to the defendant for further proceedings. From this judgment, the defendant has filed an appeal and the plaintiff a cross appeal. Because we conclude that the defendant was correct in his initial departmental determination of the plaintiff's tax liability, we find error on the defendant's appeal and no error on the plaintiff's cross appeal.

The Connecticut corporation business tax; General Statutes § 12-213 et seq.; is a tax upon the franchise of corporations, whether they be domestic or foreign, "for the privilege of carrying on or doing business, owning or leasing property within the state in a corporate capacity...." General Statutes § 12-214; Connecticut Bank & Trust Co. v. Tax Commissioner, 178 Conn. 243, 247, 423 A.2d 883 (1979); Spector Motor Service, Inc. v. Walsh, 135 Conn. 37, 56, 61 A.2d 89 (1948); Stanley Works v. Hackett, 122 Conn. 547, 551, 190 A. 743 (1937); Underwood Typewriter Co. v. Chamberlain, 94 Conn. 47, 55, 108 A. 154 (1919), aff'd, 254 U.S. 113, 41 S.Ct. 45, 65 L.Ed. 165 (1920). It is a franchise tax "measured by the entire net income ... received by such corporation ... from business transacted within the state during the income year...." General Statutes § 12-214; Connecticut Bank & Trust Co. v. Tax Commissioner, supra.

For a multistate corporation that is taxable "both within and without this state," the Connecticut corporate business tax is calculated by taxing the corporation, at current rates, upon the fraction of its entire net income that is apportioned to Connecticut in accordance with one of the formulae set out in General Statutes § 12-218. The choice of the appropriate apportionment formula depends, under § 12-218, on the nature of the taxpayer's business. Only two of these formulae have any possible bearing on the business of the plaintiff taxpayer in this case. ³ The differentiating factor between these two formulae is whether the taxpayer's income is, or is not, derived from the manufacture, sale or use of tangible personal or real property. The net income of a § 12-218(a) taxpayer, whose income is "derived from business other than the manufacture, sale or use of tangible personal or real property" is apportioned according to a one factor formula comparing the taxpayer's Connecticut gross receipts with his gross receipts "from business carried on everywhere." By contrast, the net income of a § 12-218(b) taxpayer, whose income is "derived from the manufacture, sale or use of tangible personal or real property" is apportioned by a three factor formula taking into account not only gross receipts but also property and payroll in this state and elsewhere. A corporate taxpayer who objects that the § 12-218 method of apportionment attributes to this state "an undue portion of its net income" may file with its tax return a request that the commissioner of revenue services accept an alternate measure of apportionment. General Statutes § 12-221a; ⁴ B.F. Goodrich Co. v. Sullivan 6 Conn.Sup. 373, 376-77, 224 A.2d 754 (1966). The principal issue in this case is whether the plaintiff's net income should be apportioned to Connecticut in accordance with the one factor formula of § 12-218(a) or the three factor formula of § 12-218(b). ⁵

The plaintiff, a wholly owned subsidiary of Schlumberger, Ltd., a Netherlands Antilles corporation, is a Texas corporation qualified to do business in forty-three states, including Connecticut. Nationwide, the plaintiff's business activity is twofold: it derives about 70 percent of its annual gross receipts from providing wireline services to the oil and gas industry, and about 30 percent of its gross receipts from the manufacture and sale of equipment and supplies, principally to other subsidiaries of Schlumberger, Ltd. In Ridgefield, Connecticut, the plaintiff operates a facility that conducts basic research for the development of wireline services technology.

In all the years in which the plaintiff has done business in Connecticut, it has calculated the amount of income apportionable to Connecticut for the purposes of the Connecticut corporation business tax in accordance with the formula set forth in § 12-218(b). Pursuant to § 12-221a, the plaintiff filed petitions for an alternative method of apportionment with its tax returns for the years 1977 through 1982. Alleging that the statutory method of apportionment under § 12-218(b) unfairly attributed an undue portion of its income to Connecticut, the plaintiff petitioned for an alternate, hybrid method of apportionment. It proposed that the 70 percent of its annual gross receipts derived from its wireline services be apportioned to Connecticut according to the one factor formula of § 12-218(a), and that the remaining 30 percent of its gross receipts, attributable to its manufacture and sale of personal property, be apportioned according to the three factor formula of § 12-218(b).

In the spring of 1981, the defendant notified the plaintiff that its petitions for this alternate method of apportionment had been denied. In the administrative proceedings that ensued, the plaintiff urged the defendant to interpret § 12-218 to place income from its wireline services within subsection (a) rather than within subsection (b). The defendant determined however, after a hearing held pursuant to General Statutes § 12-236, ⁶ that such income was derived from the use of tangible property, and hence was fairly apportionable to Connecticut in accordance with the three factor formula of § 12-218(b). The defendant's decision did not address the question whether § 12-218 authorized the use of a hybrid method of apportionment.

The plaintiff thereafter took a timely appeal to the trial court pursuant to General Statutes § 12-237. As in the earlier administrative proceedings before the defendant, the plaintiff argued for a hybrid method of apportionment to permit the plaintiff to use the § 12-218(a) apportionment formula for its wireline services and the § 12-218(b) apportionment formula for its manufacture and sale of personal property. In two separate counts of its complaint, the plaintiff claimed that such a result was warranted either as: (1) a proper construction of the text of § 12-218; or (2) an equitable alternative to § 12-218 whose denial was an abuse of the defendant's discretion under § 12-221a. ⁷

The trial court sustained the plaintiff's appeal, concluding that the income from the plaintiff's wireline services fell within the ambit of § 12-218(a). Without determining what relief might "be equitable," as § 12-237 permits, the court remanded the case to the defendant "for the purpose of making a fair apportionment in the light of this decision." In its memorandum of decision, the court explained that, pursuant to its § 12-221a authority, the defendant might either determine that all of the plaintiff's net income should be apportioned according to the one factor formula of § 12-218(a), or that the 70 percent/30 percent manner of apportionment originally requested in the plaintiff's petitions was the proper and equitable measure of its Connecticut tax liability.

Both parties have appealed from the judgment of the trial court. The defendant urges us to uphold its administrative ruling that the plaintiff does not qualify for § 12-218(a) apportionment. The plaintiff's cross appeal urges us to hold that, since 70 percent of its income is apportionable under § 12-218(a), its entire income is eligible for such an apportionment as a matter of law, thus obviating an administrative remand.

Before we can reach the merits of these competing claims about the construction of § 12-218 in the circumstances of this case, we must resolve a preliminary disagreement concerning the scope of our review of these claims. The plaintiff argues for the applicability of the principle that questions of the propriety of the imposition of a tax must be resolved in favor of the taxpayer. The B.F. Goodrich Co. v. Dubno, 196 Conn. 1, 6, 490 A.2d 991 (1985); Hartford Electric Light Co. v. Sullivan, 161 Conn. 145, 154, 285 A.2d 352 (1971). The defendant maintains, to the contrary, that, because the plaintiff sought discretionary relief under § 12-221a, its claim comes under the rule that deductions and exemptions from otherwise taxable income are considered a matter of legislative grace and are thus strictly construed against the taxpayer. Commissioner v. Sullivan, 356 U.S. 27, 28, 78 S.Ct. 512, 513, 2 L.Ed.2d 559 (1958); The B.F. Goodrich Co. v. Dubno, supra, 196 Conn. at 8-9, 490 A.2d 991; Yaeger v. Dubno, 188 Conn. 206, 212, 449 A.2d 144 (1982).

The plaintiff acknowledges, as it must, that its administrative petitions were framed as requests for discretionary consideration of an alternative method of tax apportionment. That administrative posture is not significant,...