True v. Heitkamp

• Decision Date: 21 May 1991
• Docket Number: No. 900317,900317
• Citation: 470 N.W.2d 582
• Court: North Dakota Supreme Court
• Parties: H.A. TRUE, Jr. & Jean D. True; Donald G. Hatten & Tamma T. Hatten; H.A. True, III & Karen S. True; Diemer D. True & Susan L. True; David L. True & Melanie A. True; Belle Fourche Pipeline Company; Black Hills Trucking, Inc.; Black Hills Oil Marketers, Inc.; Cambria Oil Company; Camp Creek Gas Company; Eighty-Eight Oil Company; Equitable Oil Purchasing Company; Reserve Oil Purchasing Company; Roosevelt Pipeline Company; Roughrider Pipeline Company; Smokey Oil Company; Toolpushers Supply Company; True Drilling Company; True Geothermal Drilling Company; True Geothermal Energy Company; True Land and Royalty Company; True Leasing Company; True Oil Company, and True Oil Purchasing Company, Plaintiffs and Appellants, v. M.K. Heidi HEITKAMP, State Tax Commissioner, Defendant and Appellee. Civ.

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470 N.W.2d 582

H.A. TRUE, Jr. & Jean D. True; Donald G. Hatten & Tamma T Hatten; H.A. True, III & Karen S. True; Diemer D. True &amp Susan L. True; David L. True & Melanie A. True; Belle Fourche Pipeline Company; Black Hills Trucking, Inc. Black Hills Oil Marketers, Inc.; Cambria Oil Company; Camp Creek Gas Company; Eighty-Eight Oil Company; Equitable Oil Purchasing Company; Reserve Oil Purchasing Company Roosevelt Pipeline Company; Roughrider Pipeline Company; Smokey Oil Company; Toolpushers Supply Company; True Drilling Company; True Geothermal Drilling Company; True Geothermal Energy Company; True Land and Royalty Company; True Leasing Company; True Oil Company, and True Oil Purchasing Company, Plaintiffs and Appellants, v. M.K. Heidi HEITKAMP, State Tax Commissioner, Defendant and Appellee.

Civ. No. 900317.

Supreme Court of North Dakota.

May 21, 1991.

John W. Morrison (argued), of Fleck, Mather & Strutz, Bismarck, and Stanley Lowe and Ronald Morris, True Oil Co., Casper, Wyo., for plaintiffs and appellants.

Jo M. Noack (argued), Asst. Atty. Gen., State Tax Dept., Bismarck, for defendant and appellee.

GIERKE, Justice.

This is an appeal from a district court judgment affirming the Tax Commissioner's denial of appellants' claims for a refund of income taxes paid for the years 1973 through 1982. We affirm.

The appellants are individual members of the True family [the Trues] and partnerships, Subchapter S corporations, and Subchapter C corporations [the True Businesses] which, at all relevant times, were owned almost in their entirety by the Trues and were engaged in some aspect of the energy business. ¹ Although the precise ownership in the True Businesses has varied from time to time, the businesses have essentially been owned by the Trues in the following proportions: H.A. True, Jr.--63%; Jean D. True--5%; Tamma T. Hatten--8%; H.A. True III--8%; Diemer D. True--8%; David L. True--8%. The Trues have been residents of, and the True Businesses have been domiciled in, Wyoming. With the exception of five of the business From 1973 through 1982, two of the principal entities through which the Trues conducted their energy business, the True Oil Company and True Drilling Company partnerships, filed state income tax returns in North Dakota and elsewhere on a "separate accounting" basis. Under this method, a multistate taxpayer computes its income attributable to a certain state on the basis of those receipts and costs related to its in-state activities only, without regard to activities carried on in the other states. See R. Tannenwald, The Pros and Cons of Worldwide Unitary Taxation, 25 Tax Notes 649 (1984). During this period, the other True Businesses that conducted part of their business in North Dakota filed their state income tax returns in North Dakota and elsewhere on the basis of separate entity formulary apportionment. Under this method, each entity's business income earned both within and without North Dakota is apportioned to this state by using the three-factor formula prescribed in Chapter 57-38.1, N.D.C.C., the Uniform Division of Income for Tax Purposes Act [UDITPA]. See I J. Hellerstein, State Taxation p 8.6 (1983); International Minerals & Chemical v. Heitkamp, 417 N.W.2d 791 (N.D.1987). The portion of business income attributable to North Dakota is determined by multiplying a business entity's total income by a fraction representing the arithmetic average of the ratios of sales, payroll, and property values within the state to those of the business as a whole. See Minnesota Mining and Mfg. Co. v. Conrad, 418 N.W.2d 276 (N.D.1987).

entities, all of the True Businesses conducted business both within and without North Dakota during 1973 through 1982.

In November 1983 True Oil and True Drilling filed amended partnership returns for 1980, 1981, and 1982 changing their method of filing from separate accounting to separate entity formulary apportionment. The two companies also filed amended business and corporation privilege tax returns for 1980 and 1981. The Trues also filed amended individual income tax returns which reflected the changes in the partnership returns. Based on these returns, which the parties refer to as the "first amended returns," the Trues claimed refunds and interest totaling more than $2,200,000. The Commissioner denied the refund claims in February 1984. In response, the Trues filed protests which were denied by the Commissioner in September 1984.

In November 1984 the Trues filed administrative complaints and amended tax returns for 1973 through 1979 as well as a second set of amended returns for 1980 through 1982. These returns, which the parties refer to as the "second amended returns," were filed on the basis of the unitary combined method of reporting for all of the True entities that were engaged in the energy business. Under this method, a group of commonly owned and controlled businesses are essentially treated as a single entity and the overall income of the integrated businesses, excluding transactions between members of the group, is apportioned among the states in which the unitary group does business. See Minnesota Mining and Mfg., supra. Based on these combined reports, the Trues sought approximately $4,000,000 in refunds and interest.

The Commissioner denied these refund claims in July 1986. The Trues filed a protest in August 1986 and, following an audit of the Trues and the True Businesses, the Commissioner issued a notice of reconsideration in May 1988 again denying the refunds based on the second amended returns. The Trues responded by filing an administrative complaint for refund which was followed by an answer to the complaint by the Commissioner. After extended discovery, an administrative hearing was held in October 1989. The Commissioner issued an order denying the claim for refunds in March 1990. The district court subsequently affirmed the Commissioner's order. This appeal followed.

The appellants assert that the energy business conducted by the True Businesses was a unitary business which was required to allocate and apportion its total income within and without North Dakota for the years in question through the use of a combined report. According to the appellants The Commissioner rejected the appellants' assertion that they had a right to file on a combined reporting basis. The Commissioner determined, among other things, that North Dakota law does not permit the filing of a combined report that includes noncorporate taxpayers, and that, even if it was permitted, the True Businesses did not constitute a unitary business because no one person or entity exercised sole control over the businesses and was also included in the unitary group. We need not determine whether North Dakota law during the tax years in question authorized noncorporate entities to file a combined report because we agree with the Commissioner that, even if our law allowed combined reporting under these circumstances, the True Businesses did not constitute a unitary business.

both the reporting of income by True Oil and True Drilling on the basis of separate accounting and the failure to combine the income of the total unitary business were errors which resulted in the overpayment of taxes and which entitle the appellants to refunds under Sec. 57-38-40, N.D.C.C.

In order to better understand the parties' positions, some background information is necessary. Under both the due process and commerce clauses of the United States Constitution, a state may not, when imposing an income-based tax, tax value earned outside of its borders. Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933, 2939, 77 L.Ed.2d 545 (1983); ASARCO Inc. v. Idaho State Tax Comm., 458 U.S. 307, 315, 102 S.Ct. 3103, 3108, 73 L.Ed.2d 787 (1982). When a business enterprise operates in more than one state, "arriving at precise territorial allocations of 'value' is often an elusive goal, both in theory and in practice." Container, supra. For that reason, it "has long been settled that 'the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs.' " Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 219, 100 S.Ct. 2109, 2118, 65 L.Ed.2d 66 (1980) [quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 460, 79 S.Ct. 357, 363, 3 L.Ed.2d 421 (1959) ]. The "three-factor" apportionment formula employed under UDITPA, which North Dakota enacted in 1965, has not only been approved by the Supreme Court, but has become "something of a benchmark against which other apportionment formulas are judged." Container, supra, 463 U.S. at 170, 103 S.Ct. at 2943; see also Trinova Corp. v. Michigan Dept. of Treasury, --- U.S. ----, ----, 111 S.Ct. 818, 833, 112 L.Ed.2d 884 (1991); Moorman Mfg. Co. v. Bair, 437 U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197 (1978).

The due process and commerce clauses also prohibit a state from taxing income arising out of a business's interstate activities unless there is a " 'minimal connection' or 'nexus' between the interstate activities and the taxing State, and 'a rational relationship between the income attributed to the State and the intrastate values of the enterprise.' " Exxon, supra, 447 U.S. at 219-220, 100 S.Ct. at 2118 [quoting Mobil Oil Corp. v. Comm'r of Taxes of Vermont, 445 U.S. 425, 436-437, 100 S.Ct. 1223, 1231, 63 L.Ed.2d 510 (1980) ]. The "unitary business" principle, which we have recognized as an "interrelated part" of UDITPA formulary apportionment [Minnesota Mining and Mfg., supra, 418 N.W.2d at 277], provides that required nexus if a unitary business is, in fact, established. Amerada Hess Corp. v. Director, Division of Taxation, 490 U.S. 66, 73, 109 S.Ct. 1617, 1621, 104 L.Ed.2d 58 (1989); F.W. Woolworth Co. v. Taxation and Revenue Dept., 458 U.S. 354,...