UNIROYAL TIRE COMPANY v. STATE DEPT. OF REVENUE
Decision Date | 28 May 1999 |
Citation | 779 So.2d 221 |
Parties | UNIROYAL TIRE COMPANY v. STATE DEPARTMENT OF REVENUE. |
Court | Alabama Court of Civil Appeals |
Daniel H. Markstein III and Thomas H. Brinkley of Maynard, Cooper & Gale, P.C., Birmingham, for appellant.
Jeff Patterson, asst. counsel, Department of Revenue, and asst. atty. gen., for appellee. BEATTY, Retired Justice.
Uniroyal Tire Company, Inc. ("Uniroyal"), appeals from a circuit court order determining a tax liability against it. We affirm.
The State Department of Revenue ("Department") assessed corporate income tax against Uniroyal for the tax year 1990, following Uniroyal's sale of a partnership interest. The assessment came about from the following facts.
In 1986, Uniroyal entered into a partnership with the B.F. Goodrich Company, wherein both corporations transferred their assets to the partnership and each received a 50% partnership interest. Thereafter, Uniroyal's only asset was its partnership interest, and between 1986 and 1989 Uniroyal treated income received from the partnership as business income. Then, in 1988, the partnership was recapitalized, resulting in Uniroyal's percentage of ownership in the partnership being reduced and in Uniroyal's receiving $80 million in cash.
Later, in 1990, Uniroyal sold its entire partnership interest for approximately $260,600,000 and realized a capital gain of approximately $99.7 million. On its 1990 Alabama tax return, Uniroyal treated the $99.7 million as nonbusiness income. The Department contested the return, maintaining that the $99.7 million was business income, and assessed corporate income tax accordingly. Uniroyal appealed to the Department's Administrative Law Division, which identified the issue before it as being governed by § 40-27-1 ("Multistate Tax Compact"), Art. IV, 1.(a), Ala.Code 1975:
"`Business income' means income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations."
(Emphasis added.)
During the administrative hearing, an executive of Uniroyal testified that the main reason for the recapitalization of 1988 was to obtain cash: "[Uniroyal's] drive was for cash out of the partnership ... and [recapitalization] was a way ... to achieve that."
The Department relied upon the wording of § 40-27-1 and its own Regulation 810-3-31-.02(1)(a)4(ii):
Upon the conclusion of the administrative hearing, the administrative law judge held that the assessment should be dismissed because, the administrative law judge found, Uniroyal's gain from the sale of its partnership interest constituted "nonbusiness income." The administrative law judge, observing uncompromisingly, stated:
"Although corporations sometimes liquidate, they are not in business for that purpose, and liquidation cannot be said to be a normal activity of any business."
Commenting upon the application of the Department's regulation, the administrative law judge added:
"However, while a Department regulation interpreting a statute should be given weight, it must be rejected if it conflicts with the language of the statute."
The Department appealed that order to the circuit court. Both parties filed summary-judgment motions, with briefs. After a hearing, the circuit court issued an order denying Uniroyal's summary-judgment motion and granting the Department's summary-judgment motion, reversing the ruling of the administrative law judge, upholding the Department's assessment against Uniroyal as valid, and increasing the assessment to reflect applicable penalties and interest, pursuant to § 40-2A-7(b)(5)d.1., Ala.Code 1975. Uniroyal appealed.
The circuit court rejected the administrative law judge's ruling as it pertained to the wording of the statute, observing:
A regulation "is to be enforced as if it were a duly enacted statute so long as the regulation is not unreasonable or inconsistent with the statute from whence it was born." Adair v. Alabama Real Estate Comm'n, 53 Ala.App. 621, 624, 303 So.2d 119, 122 (Ala.Civ.App.1974) (citing Frasier v. Finch, 313 F.Supp. 160 (N.D.Ala.1970)).
Ex parte Vizzina, 533 So.2d 658, 660 (Ala. 1988) (some emphasis added).
We agree with the analysis of the North Carolina Supreme Court in Polaroid Corp. v. Offerman, 349 N.C. 290, 507 S.E.2d 284 (1998), and we find no conflict between the regulation and the statute.
In Polaroid, the North Carolina court, interpreting a statute virtually identical to our § 40-27-1, Ala.Code 1975, determined that the definition of "business income" contained two separate and independent tests: (1) a "transactional" test or class of income and (2) a "functional" test or class. In distinguishing between the two, that court stated:
349 N.C. at 296, 507 S.E.2d at 289.
At issue in Polaroid was whether damages received by Polaroid Corporation in a patent infringement case against the Eastman Kodak Company were "business income" under North Carolina's statute. After an extensive analysis and reference to decisions in other jurisdictions dealing with the question, the court stated:
Polaroid, supra, 349 N.C. at 295-96, 507 S.E.2d at 295-96. The court then distinguished such cases from "true" liquidation cases, which it deemed "inapplicable to these situations because the asset and the transaction at issue are not in furtherance of the unitary business, but rather a means of cessation." Id. at n. 6 (emphasis added).
The North Carolina Supreme Court discussed Simpson Timber Co. v. Department of Revenue, 326 Or. 370, 953 P.2d 366 (1998) ( ), and Dover Corp. v. Department of Revenue, 271 Ill. App.3d 700, 648 N.E.2d 1089, 208 Ill.Dec. 167, app. den., 163 Ill.2d 552, 657 N.E.2d 618, 212 Ill.Dec. 417 (1995)(patent-infringement judgment representing royalties constituted income, because the patents themselves were integral assets used in regular trade or business operations). The court continued:
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