Tenneco, Inc. v. Barr, 45200

• Decision Date: 09 June 1969
• Docket Number: No. 45200,45200
• Citation: 224 So.2d 208
• Parties: TENNECO, INC. v. Dexter BARR, Chairman, and Mississippi State Tax Commission.
• Court: Mississippi Supreme Court

Page 208

224 So.2d 208

TENNECO, INC. v. Dexter BARR, Chairman, and Mississippi State Tax Commission.

No. 45200.

Supreme Court of Mississippi.

June 9, 1969.

Rehearing Denied July 3, 1969.

Brunini, Everett, Grantham & Quin, Edmund L. Brunini, Leigh B. Allen, III, John R. Hutcherson, Jackson, for appellant.

Taylor Carlisle, Thomas H. Watkins, Jackson, for appellee.

SMITH, Justice.

Tenneco, Inc. appeals from an adverse decree of the Chancery Court of the First Judicial District of Hinds County entered in a suit brought by it against Mississippi State Tax Commission under the provisions of Mississippi Code 1942 Annotated section 9220-31 (1952). The suit attacked, and the decree upheld, an order of the Mississippi State Tax Commission which disallowed certain items claimed as expense deductions and losses on Tenneco's Mississippi income tax returns for the years 1963, 1964 and 1965. Mississippi State Tax Commission and its Chairman cross-appeal from that part of the decree which reduced penalties and interest assessed against Tenneco by the Commission.

In view of the recent decision by this Court of Mississippi State Tax Commission v. Mississippi-Alabama State Fair, Miss., 222 So.2d 664 we consider it necessary to point out here that Tenneco's petition in this case was filed in the Chancery Court of Hinds County, that court having been vested with jurisdiction by the Legislature to hear and determine controversies of this kind, under the terms of Mississippi Code 1942 Annotated section 9220-31 (1952). In the present case, the chancellor heard evidence and determined the cause as in 'other cases' as provided by the statute. The appeal here also is by the authority of that section. Unlike this case, Mississippi State Tax Commission v. Mississippi-Alabama State Fair, 222 So.2d 664 (decided by this Court on May 12, 1969), involved an appeal to the circuit court, under Mississippi Code 1942 Annotated section 9075 (1952). This Court held in that case that the act of the Tax Commission appealed from was legislative in character, and that judicial review was limited under the Constitution (as well as by the terms of the statute) to a consideration by the court of the record and transcript of testimony before the Commission.

As said in Culley v. Pearl River Industrial Commission, 234 Miss. 788, 108 So.2d 390 (1959), 'The dividing line between a legislative and a judicial act is often imperceptible.'

In Prentis v. Atlantic Coast Line Co., 211 U.S. 210, 226, 29 S.Ct. 67, 69, 53 L.Ed. 150 (1908) Justice Holmes said:

A judicial inquiry investigates, declares, and enforces liabilities as they stand on present or past facts and under laws supposed already to exist. That is its purpose and end.

In the same case, Justice Holmes contrasts the nature of legislation:

Legislation, on the other hand, looks to the future and changes existing conditions by making a new rule, to be applied thereafter to all or some part of those subject to its power.

This Court has said, in California Co. v. State Oil & Gas Board, 200 Miss. 824, 840, 27 So.2d 542, 545, 28 So.2d 120 (1946):

In order that any hearing shall be judicial in character, it must proceed upon past or present facts as such, which are of such nature that a judicial tribunal may find that they do or do not exist, while in making these conservation rules and the exceptions thereto the larger question is one of state policy.

In East Third Street Franklin v. City of Bend, 234 Or. 91, 380 P.2d 625, 630 (1963) it was said:

Whether a function imposed upon a court is 'nonjudicial' and, therefore, in violation of the separation of powers principle, cannot be determined by applying abstract definitions of legislative and judicial functions. The validity of the imposition must rest upon practical considerations relevant to the efficient operation of government with due regard, of course, to the limitations upon the respective functions of the two branches fixed by tradition. If the duty imposed calls for the performance of functions to which the judicial machinery is adaptable, there can be no constitutional objection to the delegation.

It is manifest, from the express provisions of section 9220-31, that the Legislature has made it the public policy of this state to provide a full evidentiary judicial hearing in cases of the character now under consideration. Moreover, major tax cases traditionally have been considered proper subjects for judicial determination in the courts of the several states and of the United States.

There were three questions presented in the present case requiring judicial determination:

(1) Were Tenneco's gas leases unitary with its gas transmission pipeline?

(2) What and how much interest expense was properly deductible?

(3) Was Tenneco negligent in filing its return and thus subject to the imposition of a penalty?

These matters involved mixed questions of law and of the ultimate facts and were proper subjects for judicial determination.

The appellant, Tenneco, Inc. of Houston, Texas, describes itself as:

Tenneco, Inc. of Houston, Texas, a Delaware corporation, owns a pipeline system for the acquisition, transmission and sale of natural gas for resale under certificates granted by the Federal Power Commission. The Company's multiple line system begins in the gas producing areas of Texas and Louisiana and extends into the northeastern states. The system crosses Mississippi and is comprised of approximately 12,000 miles of pipeline, gathering lines, and sales laterals, together with related facilities, including some sixty principal compressor stations. Natural gas leases owned by the company in Louisiana and Texas afford the company flexibility in its supply capabilities. Underground storage reservoirs in Pennsylvania and New York increase winter deliveries in the eastern markets.

Tenneco Corporation, a wholly owned subsidiary, owns all of the stock or a controlling interest in various subsidiaries engaged in other aspects of the petroleum industry, and in the agricultural, chemical and paper products industries.

Tenneco, therefore, is a foreign corporation engaged in both unitary (the interstate gas transmission pipeline) and non-unitary activities.

In each of the years here involved, (1963, 1964 and 1965), in arriving at its unitary net income for Mississippi tax purposes, Tenneco sought to allocate all of its interest expense to its gas transmission pipeline, and also to charge off losses incurred in acquiring gas leases and in exploring for and producing gas in other states.

The interstate gas transmission pipeline system, consisting of the pipeline, gathering lines, compressor stations and other related facilities, comprises Tenneco's unitary activity. The pipeline extends from points in Texas and Louisiana into states in the northeastern United States, with approximately 15 per cent of its transmission volume capacity located in the State of Mississippi. Its non-unitary activities include ownership of other companies (approximately 50), engaged in agricultural, chemical, and paper products industries and in other aspects of the oil and gas industry. Its unitary interstate gas transmission pipeline system, which lies partly within and partly without the State of Mississippi, is the only one of Tenneco's activities subject to Mississippi income taxation.

In 1964 (for example) Tenneco's total investments amounted to $1,853,933,532, of which $454,325,123 was invested in non-unitary securities activities, $318,806,758 in non-unitary gas exploration and development activities, and $1,080,801,651 in the unitary pipeline operation.

Since the gas transmission pipeline is a unitary activity, partly within and partly without the State of Mississippi, Tenneco's annual Mississippi income tax return is filed under Mississippi Code 1942 Annotated section 9220-12 (Supp.1968).

Mississippi Code 1942 Annotated section 9220-12(1)(c) (Supp.1968) provides:

In the case of gross income derived from sources partly within and partly without the state, the net income may first be computed by deducting the expenses, losses, or other deductions apportioned or allocated thereto, and a ratable part of any expenses, losses, or other deductions which cannot definitely be allocated to some item or class of gross income; and the portion of such taxable income attributable to sources within the state may be determined by processes or formulas of general apportionment, prescribed by the commissioner, with the approval of the governor. (emphasis added).

The actions of the Tax Commission which are under attack by Tenneco may be stated briefly as: (1) disallowance of a portion of the deduction claimed for interest expense, Tenneco having sought to allocate its entire interest expense to its unitary operation (the gas transmission pipeline) and (2) refusal to allow a deduction claimed for certain losses and expenses incurred in gas exploration and development activities conducted wholly outside of the State of Mississippi.

Tenneco summarizes its contentions as follows:

1. The clear meaning of § 9220-12(1)(c) permits the company to deduct all interest expense it can directly allocate to its unitary pipeline operation; Article 105 of Regulations No. 13, denying direct allocation, is therefore invalid. Furthermore, some 'ratable part' of the company's remaining interest expense is also deductible under the statute.

2. The gas leases are an essential integral part of the pipeline, contributing substantially to its net profit, and should therefore be treated as unitary.

3. Separate accounting cannot be maintained for these leases, since there is no realistic method of valuing their contribution to the entire system.

It is the position of the Tax Commission, on the other hand, that Articles 105 and 247 of Regulations No. 13 implements the statute and is in nowise inconsistent with it. Article 105 of Regulations No. 13 provides:

Interest-There may be deducted from the gross...