Union Pacific Corp. v. IDAHO STATE TAX COM'N

Decision Date27 June 2001
Docket NumberNo. 25876.,25876.
Citation28 P.3d 375,136 Idaho 34
PartiesUNION PACIFIC CORPORATION and affiliated companies, Plaintiff-Respondent, v. IDAHO STATE TAX COMMISSION, Defendant-Appellant.
CourtIdaho Supreme Court

Hon. Alan G. Lance, Attorney General, for appellant. Geoffrey L. Thorpe, Deputy Attorney General, argued.

Hawley Troxell Ennis & Hawley LLP, Boise, for respondent. Richard G. Smith and Eugene A. Ritti argued.

EISMANN, Justice.

The Idaho State Tax Commission appeals the decision of the district court reversing the Tax Commission's assessment of tax deficiencies against the Union Pacific Corporation. The Tax Commission determined that, when apportioning income pursuant to Idaho Code § 63-3027, Union Pacific should not have included revenues from the sale of its accounts receivable within the sales factor and it should have included as business income dividends received from a limited partnership mining operation. Union Pacific filed this action seeking de novo review by the district court. Both parties moved for summary judgment, and the district court granted summary judgment in favor of Union Pacific. The Tax Commission then appealed. We vacate the decision of the district court and remand for further proceedings.

I. STANDARD OF REVIEW

In an appeal from an order of summary judgment, all disputed facts are to be construed liberally in favor of the party opposing the motion, and all reasonable inferences that can be drawn from the record are to be drawn in favor of that party. Eagle Water Company, Inc. v. Roundy Pole Fence Company, Inc., 134 Idaho 626, 7 P.3d 1103 (2000). Summary judgment is appropriate if the pleadings, sworn statements, and admissions on file show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Id.

II. ANALYSIS

Union Pacific is the parent company of a group of corporations engaged in transportation, natural resources, energy, environmental and computer technology, and services. In 1996 the Idaho State Tax Commission assessed income tax deficiencies against the Union Pacific Corporation for the years 1991, 1992, and 1993. At issue was Union Pacific's apportionment of income to Idaho pursuant to Idaho Code § 63-3027. Under that statute, corporations operating both in Idaho and in one or more other states are required to apportion a portion of their business income to Idaho. At issue in this appeal is the apportionment of income arising from two separate transactions.

A. Did monies received from the sales of accounts receivable constitute sales under Idaho Code § 63-3027(a)(5)?

Union Pacific Corporation is the parent of the Union Pacific Railroad and the Missouri Pacific Railroad. They both ship goods for customers on credit. In 1989 the railroads began selling their accounts receivable in order to generate increased cash flow. In general terms, the railroads created a pool of accounts receivable and sold, without recourse, an undivided interest in the receivables to several banks for an amount that was less than the face value of the receivables. The banks agreed to purchase interests in the accounts receivable until they had paid an agreed-upon maximum sum ($200 million in the first year). The banks issued commercial paper to finance their investment in the receivables, and they filed Uniform Commercial Code financing statements to protect the banks' interests in the receivables. The railroads, however, continued to collect the accounts receivable, and as they were collected the railroads added new receivables to the pool to maintain the face value of the receivables in the pool. The face value of the pool of receivables is kept high enough so that if the railroads discontinued operations, the banks' interests in the receivables would be sufficient for them to recover the money they paid and to pay any liability they have for the payment of interest on the commercial paper that they sold to finance their purchases of the receivables. The railroads also had to pay a $500,000 one-time origination fee and a monthly commitment fee of 0.75% of the unused amount of the banks' $200 million commitment to purchase.

Because the Union Pacific Corporation and the railroads constitute a unitary corporation transacting business in several states, their combined income for tax purposes must be apportioned among those states. Idaho Code § 63-30271 sets forth the procedure for determining what portion of the income is apportioned to, and therefore taxable by, Idaho. The apportionment is based upon a fraction. The numerator of the fraction is the total of three factors called the "property factor," the "payroll factor" and the "sales factor." I.C. § 63-3027(i). The property factor is the average value of the taxpayer's real and tangible personal property owned or rented and used in Idaho during the tax period divided by the average of all such property owned or rented and used by the taxpayer everywhere during the tax period. I.C. § 63-3027(j). The payroll factor is the total amount that the taxpayer paid in Idaho for compensation during the tax period divided by the total amount that the taxpayer paid for compensation everywhere during the tax period. I.C. § 63-3027(m). The sales factor is the total sales by the taxpayer in Idaho during the tax period divided by the taxpayer's total sales everywhere during the tax period. I.C. § 63-3027(o). The total of those three factors is then divided by three in order to apportion business income to Idaho. I.C. § 63-3027(i).

Union Pacific included in the sales factor as part of its total sales everywhere the railroads' freight revenues, based upon the accrual accounting method. It also included as part of its total sales everywhere the monies received from the sale of the accounts receivable. At issue in this case is whether the money received from the sale of the accounts receivable should be included as sales when calculating the sales factor. Because the sales of the accounts receivable did not occur in Idaho, including such income as sales will increase the denominator of the sales factor, thereby decreasing the value of the sales factor, thereby decreasing the taxable business income apportioned to Idaho.

The district court initially ruled that the sale of the accounts receivable was nothing more than collateralized borrowing and that it did not constitute "sales" for the purpose of apportioning business income under Idaho Code § 63-3027(i). Union Pacific Corporation then moved for reconsideration, pointing out answers by the Tax Commission to three requests for admission in which the Tax Commission admitted: (1) "that Plaintiff's proceeds from its sales of accounts receivable were business income;" (2) "that Plaintiff sold its accounts receivable in transactions that qualify as a `sale' pursuant to I.C. § 63-3027(a)(5);" and (3) "that Plaintiff's sales of its accounts receivable were not loans against a receivable accounts [sic]." Based upon the Tax Commission's answers to these requests for admissions, the district court granted summary judgment to Union Pacific.

With the Tax Commission's answers to the requests for admission, the district court did not err in holding that the proceeds from the sale of the receivables were "sales" pursuant to Idaho Code § 63-3027(a)(5) and were therefore properly includable in the sales factor when apportioning Union Pacific's business income to Idaho. A request for admission can include the application of law to fact, and, unless the trial court permits the answer to be withdrawn or amended, the matter admitted is conclusively established for the purposes of the pending litigation. I.R.C.P. 36(a) & (b).

The Tax Commission argues that even with its answers to the requests for admission, the monies received from the sale of the accounts receivable should not have been considered because such sales were not an income producing activity. Idaho Code § 63-3027(i) provides, "All business income shall be apportioned to this state by multiplying the income by a fraction, the numerator of which is the property factor plus the payroll factor plus the sales factor, and the denominator of which is three (3)." It is "business income" that is apportioned. The Tax Commission admitted that Union Pacific's "proceeds from its sales of accounts receivable were business income." To apportion business income, you must calculate the "sales factor," which is defined as "a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period." I.C. § 63-3027(o). The words "sales" in the statutory definition of the sales factor obviously mean "sales" as defined by Idaho Code § 63-3027(a)(5). The Tax Commission admitted that Union Pacific "sold its accounts receivable in transactions that qualify as a `sale' pursuant to I.C. § 63-3027(a)(5)." With the admissions made by the Tax Commission, there is simply no basis for not including the proceeds from the sales of the accounts receivable in the sales factor when apportioning income pursuant to Idaho Code § 63-3027(i). That is not the end of the analysis, however.

Idaho Code § 63-3027(r) provides that the Tax Commission can deviate from the apportionment provisions of § 63-3027 if those provisions do not fairly represent the extent of the taxpayer's business activity in this State.2 In this case, the Tax Commission found that "inclusion of the proceeds of the taxpayer's sales of receivables in the combined sales factor results, along with the other factors, in an apportionment that does not fairly represent how the taxpayer earns its income." When granting summary judgment, however, the district court did not address this issue.

The annual amounts of receivables sold by the railroads were approximately $2.5 billion in 1991, $2 billion in 1992, and $1.9...

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  • Noell Indus., Inc. v. Idaho State Tax Comm'n
    • United States
    • United States State Supreme Court of Idaho
    • May 22, 2020
    ...constitute integral or necessary parts of the taxpayer's trade or business operations." Union Pac. Corp. v. Idaho State Tax Comm'n , 136 Idaho 34, 38–39, 28 P.3d 375, 379–80 (2001) (quoting I.C. § 63-3027(a)(1) ). See also IDAPA 35.02.02.332 through 333. Here, the Idaho Tax Commission is tr......
  • Noell Indus., Inc. v. Idaho State Tax Comm'n
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    • May 22, 2020
    ...constitute integral or necessary parts of the taxpayer's trade or business operations." Union Pac. Corp. v. Idaho State Tax Comm'n , 136 Idaho 34, 38–39, 28 P.3d 375, 379–80 (2001) (quoting I.C. § 63-3027(a)(1) ). See also IDAPA 35.02.02.332 through 333. Here, the Idaho Tax Commission is tr......
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    • January 5, 2004
    ...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 fro......
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    ...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 fro......
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1 books & journal articles
  • The ABCs of Florida Corporate Income Tax.
    • United States
    • Florida Bar Journal Vol. 76 No. 11, December 2002
    • December 1, 2002
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