Union Twist Drill Co. v. Harvey

• Decision Date: 02 May 1944
• Docket Number: No. 1729.,1729.
• Citation: 37 A.2d 389
• Parties: UNION TWIST DRILL CO. v. HARVEY, Commissioner of Taxes.
• Court: Vermont Supreme Court

37 A.2d 389

UNION TWIST DRILL CO.

v.HARVEY, Commissioner of Taxes.

No. 1729.

Supreme Court of Vermont.

May 2, 1944.

COPYRIGHT MATERIAL OMITTED.

Exceptions from Washington County Court; Orrin B. Hughes, Presiding Judge.

Proceedings by Union Twist Drill Company, petitioner, against Irwin M. Harvey, Commissioner of Taxes, petitionee, for relief from assessment of franchise taxes. To review the judgment, both parties bring exceptions.

Reversed and judgment entered in accordance with opinion.

Before MOULTON, C. J., and SHERBURNE, BUTTLES, STURTEVANT, and JEFFORDS, JJ.

George L. Hunt, of Montpelier, and R. E. Tibbetts, of Boston, Mass., for plaintiff.

Gelsie J. Monti, of Barre, for defendant.

MOULTON, Chief Justice.

The petitioner is a Massachusetts corporation, engaged in the manufacture of small cutting tools, and authorized to transact business within the State of Vermont. At all times here material it has owned and operated four factories; at Athol, Massachusetts, which produces taps and dies, and is its main office; at Mansfield, Massachusetts, known as the E. S. Card Division, where taps, dies, reamers, drills and cutters are manufactured; at Rock Island, in the province of Quebec, the output of which is of the same kind as at the Card Division; and at Derby Line in this State, where taps, dies, reamers and other similar tools are made. The Rock Island plant is just across the boundary between the United States and Canada, and the Derby Line factory is just this side of it, and the two are connected by an enclosed passage way over the river that forms at this point the international boundary. These two plants were originally a distinct and independent establishment, known as Butterfield and Company, but at some time before the present controversy arose, they became the property of the petitioner corporation, and together are known as the Butterfield Division.

The proceeding is a petition brought by the petitioner to the County Court within and for Washington County as provided by P.L. 909 seeking relief from the assessments of franchise taxes made against it by the petitionee, the Commissioner of Taxes for this State, for the years 1934, 1935, 1936, 1937 and 1938. After hearing the County Court filed findings of fact and entered an order which pleased neither party and the cause comes to this Court on the exceptions of both of them.

The Vermont Income and Franchise Tax Act (chapters 39-41 inclusive of the Public Laws) took effect on December 31, 1931. The pertinent provisions of the Act are these: An annual franchise tax computed at the rate of two per cent upon its net income for the next preceding fiscal or calendar year, is imposed by P.L. 887 upon every foreign corporation, liable to tax under P.L. Chapter 40, doing business in this State. P.L. 888 provides that: “If the entire business of the corportion be transacted within the state, the tax imposed shall be based upon the entire net income of such corporation for such fiscal or calendar year. If the entire business of the corporation be not transacted within the state and its gross income derived from business done both within and without the state, the determination of its net income shall be based upon the business done within the state and for the purpose of computing such net income the commissioner shall adopt such recommendations and regulations for the allocation of net income as will fairly and justly reflect the net income of that portion of the business done within the state.” The form and content of the returns to be filed by the corporation are prescribed in P.L. 893 and 894, and by subdivision XI of the latter section: “If it shall appear to the commissioner that the segregation of assets shown by any report made under this section does not properly reflect the corporate activity or business done in this state, because of the character of the business of the corporation and the character and location of its assets, the commissioner is authorized and empowered to equitably adjust the tax upon the basis of the corporate activity or the business done within and without the state rather than upon capital or assets employed.” And P.L. 902 contains the following: “When the commissioner discovers from the examination of the return or otherwise that the income of any taxpayer, or any portion thereof, has not been assessed, he may, at any time within two years after the time when the return was due, assess the same and give notice to the taxpayer of such assessment, and such taxpayer shall thereupon have an opportunity, within thirty days, to confer with the commissioner as to the proposed assessment. The limitation of two years to the assessment of such tax or additional tax shall not apply to the assessment of additional taxes upon fraudulent returns. After the expiration of thirty days from such notification, the commissioner shall assess the income of such taxpayer or any portion thereof which he finds has not theretofore been assessed and shall give notice to the taxpayer so assessed, of the amount of the tax and interest and penalties, if any, and the amount thereof shall be due and payable within ten days from the date of such notice. The provisions of this chapter with respect to *** appeal shall apply to a tax so assessed. ***” The foregoing section is quoted as amended by No. 28, § 4, Acts of 1937, but the amendment does not affect any question raised in this cause.

The substance of the findings of fact follows: In 1932 the Commissioner of Taxes issued a ruling, under the authority of P.L. 888, that corporate returns must be prepared on the basis of net income as shown by the Federal Income Tax Returns, and not upon the separate basis of business done in Vermont. Shortly after the passage of the Income and Franchise Tax Act, he issued a bulletin for the guidance of taxpayers, which stated that where a corporation did business partly within the State of Vermont, the tax was to be computed under such regulations as he should adopt, and that he was authorized to adjust a tax upon the basis of corporate activity or business done within and without the State rather than upon capital or assets involved. A copy of this bulletin was received by the petitioner's accountants, who wrote a letter of inquiry to the Commissioner, and, on February 20, 1935, received a reply from the Commissioner's assistant informing them that the department had no special formula for the allocation of the net income of a foreign corporation doing business in Vermont, and advising that a return should be filed in which the income should be allocated upon a basis which “you think fairly represents the net income earned in Vermont,” and that if the Department should not feel that the allocation properly reflected the Vermont income, the return would be audited and the petitioner notified of changes made.

Thereafter the petitioner duly filed returns for the years 1934 to 1937, inclusive, which were prepared on the basis that the Derby Line plant was a separate and distinct entity and taxable as such without regard to any question of allocation, and were made upon the profit and loss as shown by the books of the plant. In each instance the amount of gross sales reported covered all sales of products manufactured in Vermont, including the sales of such products as were made at the petitioner's branch stores located in other states. In making these returns the petitioner acted in good faith and without fraud or false statements. The taxes computed thereon were duly paid and received by the tax department. For 1934 the books showed a loss of $32415.42 and no tax was paid. For 1935 a tax of $230.79 was paid; for 1936, $1177.51; and for 1937, $2755.99.

On May 16, 1938, the petitioner was informed that the taxes for the years mentioned had been revised in accordance with a formula by which the ratio that the gross sales of the products of the Derby Line plant, as reported in the petitioner's returns, bore to the total gross sales from all its factories, was added to the ratio that the amount of its assets in Vermont bore to its total assets, and one half the sum applied as a multiplier to the net income of the petitioner as shown by its Federal income tax return for each of the years in question, two percent of the resultant figure being, in each instance, the additional tax imposed. Thus, these additional taxes, together with interest from the times the respective returns were due were as follows: 1934, $481.34; 1935, $796.28; 1936, $659.59; 1937, $1570.97; in all, $3508.18. On June 15, 1938, formal notice of the foregoing assessments was sent to the petitioner.

The petitioner filed its return for 1938 when it was due in 1939, which showed a loss for the fiscal year amounting to $9,168.10, and on April 4, 1941, notice was sent to it that an additional tax of $500 had been assessed thereon, with the information that; “This is an arbitrary assessment made to hold the return open beyond the statute of limitation period, April 15, 1941.” A like assessment, for the same amount and for the same purpose was made on April 12, 1939, on the return for 1936, due in 1937.

On May 21, 1938, the petitioner, through its counsel, requested a conference with the Commissioner as provided in P.L. 902. Other requests were made from time to time, to which the replies received from the tax Department were, in effect, that the Commissioner's time was taken; that a date would be appointed, but that, owing to the volume of work before the Commissioner, no conference could be had before the 1st of July. On September 8 the Commissioner wrote saying that the assessment made by him on June 15 had been suspended and a date for a conference would be fixed. Several other requests were made in writing and in person before and after the assessment of additional taxes on the return of 1938, but no conference could be obtained until June 4, 1941, at which the Commissioner refused to modify...