SFN Shareholders Grantor Trust v. Indiana Dept. of State Revenue

• Citation: 603 N.E.2d 194
• Decision Date: 13 November 1992
• Docket Number: No. 49T10-9109-TA-00049,49T10-9109-TA-00049
• Parties: SFN SHAREHOLDERS GRANTOR TRUST, Successor in Interest to SFN Companies, Inc., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.
• Court: Tax Court of Indiana

Page 194

603 N.E.2d 194

SFN SHAREHOLDERS GRANTOR TRUST, Successor in Interest to SFN Companies, Inc., Petitioner, v. INDIANA DEPARTMENT OF STATE REVENUE, Respondent.

No. 49T10-9109-TA-00049.

Tax Court of Indiana.

Nov. 13, 1992.

Barton T. Sprunger, Mark J. Richards, Ice Miller Donadio & Ryan, Indianapolis, for petitioner.

Linley E. Pearson, Atty. Gen., Marilyn S. Meighen, Deputy Atty. Gen., Indianapolis, for respondent.

FISHER, Judge.

Petitioner, SFN Shareholders Grantor Trust (SFN), the successor in interest to SFN Companies, Inc. (SFNCI), appeals the final determination by the Respondent, Indiana Department of State Revenue (the Department), assessing gross income tax on SFNCI's 1986 sale of shares in Scott, Foresman and Company (Scott Foresman). The case is before the court on SFN's motion for partial summary judgment.

ISSUE ¹

I. Whether SFN's income from the sale of its Scott Foresman shares was derived from "sources within Indiana" within the meaning of IND.CODE 6-2.1-2-2(a)(2)?

FACTS

The parties do not dispute the material facts. SFNCI, a Delaware corporation Scott Foresman was and is a publisher, operating primarily in the educational textbook market. Originally incorporated in Illinois in 1896, Scott Foresman reincorporated in Delaware in 1969, but retained its principal place of business in Illinois. For several years prior to the 1986 transaction at issue, Scott Foresman held title to and operated a textbook warehouse in Pinola, Indiana. This Indiana warehouse was but one of many that Scott Foresman maintained throughout the United States, and over the ten year period ending December 31, 1986, it accounted for less than thirty percent (30%) of Scott Foresman's property, ten percent (10%) of its payroll, and four percent (4%) of its sales.

was incorporated in 1979 and dissolved in 1986. Throughout its existence, SFNCI maintained its principal offices in Illinois and never owned property, solicited or conducted business, or had employees in Indiana. SFNCI was a holding company, maintaining a diverse portfolio of securities and debt instruments. During 1986, SFNCI owned all the shares of sixteen different corporations, including Scott Foresman. Additionally, two of SFNCI's Directors were the Directors of Scott Foresman.

In 1986, SFNCI negotiated with Time Incorporated (Time) for the sale of the Scott Foresman shares. The parties negotiated, drafted, and executed the sale agreement exclusively in New York City and Chicago, with the help of lawyers and bankers from those two cities. The parties consummated the sale in New York on December 29, 1986, when Time paid SFNCI $520,000,000 for 100% of the Scott Foresman shares. At that time, the physical stock certificates were transferred to Time from a safety deposit box in suburban Chicago, where SFNCI had always kept them. Neither the sale transaction nor any of its surrounding circumstances occurred in Indiana, and there was no separate sale or other transaction involving the Indiana warehouse. Immediately after the sale, SFNCI was dissolved, and SFN was formed to wrap up SFNCI's affairs. Scott Foresman continues to maintain the warehouse, operating as a subsidiary of Time, incorporated in Delaware and residing in Illinois.

The Department initially attempted to tax Scott Foresman on the proceeds of the sale, but rejected that course after determining that Scott Foresman received nothing from the sale. The Department thereafter proposed to tax SFN on the proceeds of the sale. ² SFN protested, and following full administrative review, the Department denied the protest. After SFN filed its original tax appeal, this court, by agreement of the parties, enjoined collection of the tax. Additional facts will be supplied as necessary.

DISCUSSION AND DECISION

I

When reviewing a motion for summary judgment, including a motion for partial summary judgment, the court is to grant the motion only if no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Ind. Trial Rule 56(C); Bethlehem Steel Corp. v. Indiana Department of State Revenue (1992), Ind.Tax, 597 N.E.2d 1327, 1329; Winona Memorial Foundation v. Lomax (1984), Ind.App., 465 N.E.2d 731, 733, trans. denied. Because, as the parties agree, there is no genuine issue of material fact in this case, the dispositive question is whether Indiana can assess

gross income tax against SFN on the sale of the Scott Foresman shares.

II

This appeal, like Bethlehem Steel, 597 N.E.2d 1327, Indiana-Kentucky Electric Corp. v. Indiana Department of State Revenue (1992), Ind.Tax, 598 N.E.2d 647, and First National Leasing and Financial Corp. v. Indiana Department of State Revenue (1992), Ind.Tax, 598 N.E.2d 640, before it, concerns the liability of a non-resident of Indiana for Indiana gross income tax. For non-residents, Indiana assesses gross income tax on the receipt of "the taxable gross income derived from activities or businesses or any other sources within Indiana." IC 6-2.1-2-2(a)(2).

In Bethlehem Steel, the court set out the three part inquiry to determine the taxability of a non-resident taxpayer under IC 6-2.1-2-2(a)(2): "(1) are the receipts 'gross income,' (2) is the 'gross income' derived from 'sources within Indiana,' and (3) is the 'gross income' that is derived from 'sources within Indiana' 'taxable gross income'?" Id. at 1330. Only if all these questions are answered affirmatively does the court consider any constitutional questions raised by the parties. Id. (quoting Indiana Dep't of State Revenue v. J.C. Penney Co. (1980), Ind.App., 412 N.E.2d 1246, 1252). Because the parties properly do not contest that the $520,000,000 fits squarely within the definition of "gross income" under IND.CODE 6-2.1-1-2, see, e.g., Madding v. Indiana Dep't of State Revenue (1971), 149 Ind.App. 74, 85-86, 270 N.E.2d 771, 777, the court first considers whether SFN's gross income on the sale of the Scott Foresman shares is derived from "sources within Indiana."

The parties agree the Scott Foresman shares were intangible personal property under 45 I.A.C. 1-1-51. As discussed in Bethlehem Steel, 45 I.A.C. 1-1-51 sets out two tests, the "business situs" test and the "commercial domicile" test, to determine whether income from an intangible has an Indiana source. Bethlehem Steel, 597 N.E.2d at 1334. Unless a taxpayer is commercially domiciled in Indiana, however, the "commercial domicile" test is irrelevant because the analysis under that test is then identical to the analysis under the "business situs" test. Id. at 1335 (quoting 45 I.A.C. 1-1-51). To impose tax under the "business situs" test, "(1) the taxpayer [must have] a 'business situs' in Indiana and (2) the intangible or the income therefrom [must be] connected with the business at the Indiana situs, i.e., 'the intangible or the income derived therefrom [must] form[ ] an integral part of a business regularly conducted at a situs in Indiana.' " Id. (quoting 45 I.A.C. 1-1-51). Because it is beyond dispute that Indiana has never been the "commercial domicile" of either SFN or SFNCI, the question is simply whether SFNCI had a "business situs" in Indiana.

The Department argues SFNCI had a "business situs" in Indiana by virtue of Scott Foresman's Pinola warehouse and associated activities in Indiana. The Department's reasoning is based on two interrelated premises: first, that SFNCI's ownership of the Scott Foresman shares amounted to ownership of Scott Foresman's assets, and second, that the decisions of this court and the Indiana Supreme Court in Hoosier Energy Rural Electric Cooperative, Inc. v. Indiana Department of State Revenue (1988), Ind.Tax, 528 N.E.2d 867, aff'd, (1991), Ind., 572 N.E.2d 481, cert. denied, (1991), --- U.S. ----, 112 S.Ct. 337, 116 L.Ed.2d 277, establish a blanket state tax rule that the "business situs" of an intangible is the same as the "business situs" of a portion of the tangible property underlying the intangible. Although a taxpayer may establish a "business situs" by, among other things, using, occupying, or operating a warehouse, or by owning, leasing, renting, or operating real or personal income producing property within Indiana, 45 I.A.C. 1-1-49, SFNCI did not have an Indiana "business situs" under either theory espoused by the Department.

A. Ownership of Shares

One of the hallmarks of Anglo-American corporate law is the status of the corporation as a distinct entity, an artificial Contrary to the Department's assertion, the doctrine of separate corporate identity does not break down merely because a corporation is a subsidiary, even if it is wholly owned by its parent. First Nat'l Leasing, 598 N.E.2d at 645-46; 1 W. Fletcher, Cyclopedia of the Law of Private Corporations Sec. 40 (rev. perm. ed. 1990). See also Olympia Equip. Leasing Co. v. Western Union Tel. Co. (7th Cir.1986), 786 F.2d 794, 798. Even a holding company, like SFNCI, does not own the assets of the corporations in which it holds shares; it owns only the shares. 1 W. Fletcher, Cyclopedia of the Law of Private Corporations Sec. 31 (rev. perm. ed. 1990). See also Benner-Coryell Lumber Co. v. Unemployment Compensation Bd. (1940), 218 Ind. 20, 28, 29 N.E.2d 776, 780, cert. denied (1941), 312 U.S. 698, 61 S.Ct. 741, 85 L.Ed. 1132 (a corporation's status as a distinct entity "is unaffected by the fact that a majority of its stock may or may not be controlled by the same interests"); Holsclaw, 644 S.W.2d at 355 (sole shareholder cannot ignore corporate entity); Penn, 655 S.W.2d at 632 (sole shareholder owns only shares; title to corporate property remains in corporation). Outside the context of dissolution, the sale of 100% of a corporation's shares does not amount to a sale of assets. McClory, 51 S.W.2d at 741. Most important, the norms of corporate law do not disappear in tax cases, see, e.g., Madding; 1 W. Fletcher, Cyclopedia of the Law of Private Corporations Sec. 40 (rev. perm. ed. 1990), and this court has made clear...