Union Pacific Corp. v. STATE TAX COM'N

• Citation: 139 Idaho 572,83 P.3d 116
• Decision Date: 05 January 2004
• Docket Number: No. 29219.,29219.
• Parties: UNION PACIFIC CORPORATION and affiliated companies, Plaintiff-Appellant, v. IDAHO STATE TAX COMMISSION, Defendant Respondent.
• Court: United States State Supreme Court of Idaho

83 P.3d 116

139 Idaho 572

UNION PACIFIC CORPORATION and affiliated companies, Plaintiff-Appellant, v. IDAHO STATE TAX COMMISSION, Defendant Respondent.

No. 29219.

Supreme Court of Idaho, Boise, December 2003 Term.

January 5, 2004.

Hawley, Troxell, Ennis & Hawley, Boise, for appellant. Richard G. Smith argued.

Hon. Lawrence G. Wasden, Attorney General, Boise, for respondent. Charles E. Zalesky argued.

BURDICK, Justice.

NATURE OF THE CASE

This is a corporate income tax case. Union Pacific Corporation (UPC) is seeking reversal of the district court's decision upholding the application of alternative apportionment provisions of I.C. § 63-3027 to determine that portion of UPC's business income attributable to Idaho.

FACTS AND PROCEDURAL BACKGROUND

UPC received a notice of deficiency from the Tax Commission for the tax years 1991, 1992, and 1993. UPC timely filed a protest of the proposed tax deficiencies, which were affirmed by the Commission in a decision dated June 3, 1997. UPC appealed the decision to the district court, which ruled in UPC's favor. The decision of the district court, which was appealed by the Commission, was reversed on appeal with the Court holding in relevant part that "including in the apportionment formula set forth in I.C. § 63-3027(i) both accounts receivable from freight sales and money received from the sale of those accounts receivable results in an apportionment that does not fairly represent how UPC earns its income." The Court remanded for the district court to consider an alternative apportionment formula. Union Pacific Corporation v. Idaho State Tax Comm'n (UPC I), 136 Idaho 34, 28 P.3d 375 (2001).

The district court on remand determined to apply an alternative apportionment formula and to exclude from the sales factor denominator UPC's sales of accounts receivable. The sales factor is but one of three components of the formula found in the Uniform Division of Income for Tax Purposes Act ("UDITPA") to identify the share of a corporation's income apportioned to a state; it is a fraction, the numerator of which is the total sales by the taxpayer in Idaho during the tax period and the denominator of which is the taxpayer's total sales everywhere during the tax period.

The district court's decision specifically addressed the "double counting of revenues" that occurred by virtue of UPC's reporting, which included accounts receivable from freight sales under the accrual accounting method, and also included the sales of those same accounts receivable under the cash accounting method, thereby understating the taxpayer's instate revenues. The district court acknowledged that ordinarily, with the use of an accrual method of bookkeeping, UPC would have only one set of receipts in its sales factor—the accrued freight revenues. The district court found that deleting the proceeds of the receivable sales from the sales factor calculated by UPC was a "reasonable" alternative apportionment method, which more accurately represents UPC's Idaho business activity for the years in question.

The district court noted that in this case, the Tax Commission not the taxpayer was asking the court to sanction the application of an alternative apportionment formula, in order to prevent Idaho income from escaping proper taxation. The district court ruled that application of alternative apportionment was not limited to cases with unconstitutional results, cases which produce a "gross distortion" between the statutory calculation and the proposed alternative, or that it discriminates against interstate commerce or unfairly subjects UPC to double taxation, as UPC had argued. In spite of UPC's claim that the sales of accounts receivable are not unusual, unique or nonrecurring, the district court held that the facts clearly established this to be an unusual fact situation, making it appropriate for alternative apportionment in that the statutory formula did not fairly represent UPC's Idaho activity. The district court entered partial summary judgment in favor of the Tax Commission and denied UPC's summary judgment motion. UPC has appealed from the judgment.

UPC claims on appeal that the sanctioning of an alternative apportionment was the result of the district court's improper application of the facts to the law, inadequate consideration of all three factors of the apportionment formula, and failure to evaluate whether the potential "understatement" from the use of the standard formula was in excess of a normal tolerance so as to justify deviation from that formula.

STANDARD OF REVIEW

Where both parties file motions for summary judgment relying on the same facts, issues and theories, the judge, as trier of fact, may resolve conflicting inferences if the record reasonably supports the inferences. Riverside Dev. Co. v. Ritchie, 103 Idaho 515, 518-20, 650 P.2d 657, 661-62 (1982). This court exercises free review as to application of the law to the facts so found. Marshall v. Blair, 130 Idaho 675, 679, 946 P.2d 975, 979 (1997). All reasonable inferences are to be drawn in favor of the party opposing the summary judgment motion. Union Pacific Corp. v. Idaho State Tax Comm'n, 136 Idaho 34, 28 P.3d 375 (2001).

DISCUSSION

I.

Idaho Code Section 63-3027(s) (formerly subsection (r)) provides that the Tax Commission may require alternative apportionment (a) if the allocation and apportionment provisions of the statute do not fairly represent the extent of the taxpayer's business and (b) if the alternative apportionment is reasonable. Before the statutory apportionment can be rejected in favor of an alternative apportionment, either the Commission or the taxpayer must show that the three-part formula does not accurately reflect the taxpayer's business in the State. See I.C. § 63-3027(s). The party asserting alternative apportionment bears the burden of showing that alternative apportionment is appropriate. Burlington Northern, Inc. v. Idaho State Tax Comm'n, 121 Idaho 808, 828 P.2d 837 (1992).

The "reasonableness" of the alternative apportionment proposed by the Commission was left to the district court to decide on remand. The Commission's alternative apportionment sought to exclude from the denominator of the sales factor, the sale of accounts receivable totaling approximately $2.0 billion per year, which increased the denominator and ultimately reduced the amount of tax owed by UPC to the State of Idaho. UPC argues that in UPC I, the Court affirmed that the receivables were "sales" within the meaning of I.C. § 63-3027, represented business income from outside the State and were therefore to be included in the denominator of the sales factor.

The doctrine of "law of the case," mandates that the rule of law necessary to the Court's decision in UPC I must be adhered to throughout the case's subsequent progress, both in the trial court and upon subsequent appeal. See Suitts v. First Sec. Bank of Idaho, 110 Idaho 15, 21, 713 P.2d 1374, 1380 (1985)

. Where the case is remanded to the trial court, the case "must be tried in light of and in consonance with the rules of law as announced by the appellate court in that particular case." Creem v. Northwestern Mut. Fire Ass'n of Seattle, Wash., 58 Idaho 349, 352, 74 P.2d 702, 703 (1937). We are bound under the law of the case by the holding in UPC I that to include in the apportionment formula set forth in I.C. § 63-3027(i) both accounts receivable owing from freight sales and money received from the sale of those accounts receivable, as UPC has done, results in an apportionment that does not fairly represent how Union Pacific earns its income. See id. at 39, 28 P.2d at 380.

The district court on remand found that UPC had computed the sales factor by counting the same income twice and that the double-counting was an "unusual fact situation" that justified avoidance of the statutory apportionment set forth in I.C. § 63-3027. Tax Commission Rule 27,4.18.a is the source of the "unusual fact situation" language, which UPC asserts was not met in this case. The Rule in effect in 1991 read, in relevant part, as follows:

Section 63-3027(r) and Article IV.18 permit a departure from the allocation and apportionment provisions of Section 63-3027 and Article IV only in limited and specific cases. Section 63-3027 and Article IV.18 may be invoked only in specific cases where unusual fact situations (which ordinarily will be unique and non-recurring) produce incongruous results under the apportionment and allocation provisions contained in Section 63-3027 and Article IV....

UPC argues that the fact situation to be scrutinized is the underlying transaction— the sale of receivables—which is neither unique nor nonrecurring, not the reporting method per se. UPC contends that the reporting method of including freight sales accrued as income before being collected and again as cash proceeds upon the discounted sale of the receivables to a third party cannot be viewed as an "unusual fact situation," as contemplated by the Rule. The absence of evidence of an "unusual fact situation," argues UPC, precludes the alternative apportionment authorized by the statute. For the district court to find an "unusual fact situation" under Tax Commission Rule 27,4.18.a, argues UPC, would nullify the prior rulings of the Court and allow the Commission to make ad hoc decisions that certain reporting methods were "unusual" even where they are legally permitted.

UPC also suggests that "unusual fact situations" is ambiguous and argues that the parenthetical following that language cannot logically refer to a taxpayer's reporting method. However, UPC also argues that the obvious intent of the Rule is to address transactions and other fact situations that occur in a business that may give rise to items of taxable income. UPC posits that the sale of accounts receivable is a common business practice and as such cannot be construed as an unusual fact situation.

There is a very strong presumption in favor of...