Western Contracting Corp. v. State Tax Commission
| Decision Date | 17 May 1966 |
| Docket Number | No. 10322,10322 |
| Citation | 414 P.2d 579,18 Utah 2d 23 |
| Parties | d 23 WESTERN CONTRACTING CORPORATION, a corporation, Plaintiff, v. STATE TAX COMMISSION, Defendant. |
| Court | Utah Supreme Court |
Fabian & Clendenin, Kenneth J. Hanni, Bryce E. Roe, Sanford M. Stoddard, Salt Lake City, for plaintiff.
Phil L. Hansen, Atty. Gen., F. Burton Howard, Sp. Asst. Atty. Gen., Salt Lake City, for defendant.
Review of a decision of the State Tax Commission imposing a corporation franchise tax deficiency assessment upon the plaintiff in the sum of $32,913.59.
Plaintiff is an Iowa corporation, qualified to do business in the State of Utah, engaged in the general construction business. In 1958, it entered into a contract with Kennecott Copper Corporation to perform certain stripping operations within this state.
During the calendar year 1962, plaintiff was also engaged in several projects in other states. On several of these projects it suffered rather heavy losses. Excluding the Kennecott project, its total project revenue was $23,104,804.53 and its total project cost $24,806,696.86--resulting in a net loss of $1,702,892.33.
Plaintiff's gross revenue from its Utah operation during the same year was $6,144,875.00. It was stipulated that on a segregated accounting basis, after deducting applicable expenses, the net profit before federal taxes to be allocated to the Utah project was the sum of $1,741,237.43. Offsetting this last figure against its losses, plaintiff's total net income, before federal taxes, for 1962 was $555,088.31. After deducting investment credit of $86,071.71, it paid federal income taxes in the amount of $183,215.11 resulting in a total net income of $371,873.20.
In its 1962 franchise tax return to the State of Utah plaintiff, using a segregated accounting method as it had in previous years, reported a Utah income of $1,741,237.43 and deducted therefrom the amount of $905,443.46 for federal taxes which would have been due had it been doing business in Utah alone. This last deduction was disallowed by the Commission which took the position that the deduction must be computed by allocating to Utah only its proportionate burden of the federal taxes actually paid--$183,215.11.
In its order, the Tax Commission concluded as a matter of law that plaintiff was not a unitary business and that its Utah income was separable from its foreign income and subject to taxation in its entirety. It further held that the statutory formula provided by Section 59--13--20, U.C.A.1953, did not allocate or tax the portion of plaintiff's net income reasonably attributable to business done within this state, but that the segregated method of accounting did accomplish a fair allocation. However, in regard to the proper deduction for federal income taxes, the Commission determined that the taxes actually paid must be apportioned and that such taxes cannot be assigned to loss operations nor can deductions attributable to loss operations in another state be allocated to profit operations in the State of Utah.
In seeking to set aside the Commission's order, plaintiff contends that, (1) its Utah income should be taxed pursuant to the statutory formula rather than by a segregated accounting method or, in the alternative, if the latter method be deemed applicable, (2) it cannot be taxed on any amount which exceeds its total net income and, further, (3) that if the allocated net income to Utah can exceed its total net income, then a deduction for federal income taxes on an 'equivalent' basis must be allowed.
The pertinent provisions of Section 59--13--20, U.C.A. provide:
'The portion of net income assignable to business done within this state, and which shall be the basis and measure of the tax imposed by this chapter, may be determined by an allocation upon the basis of the following rules * * *
(5) If the bank or other corporation carries on no business outside this state, the whole of the remainder of net income may be allocated to this state.
(6) If the bank or other corporation carries on any business outside this state, the said remainder may be divided into three equal parts:
(a) Of one third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the value of the corporation's tangible property situated within this state and whose donominator is the value of all the corporation's tangible property wherever situated.
(b) Of another third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the total amount expended by the corporation for wages, salaries, commissions or other compensation to its employees and assignable to this state and whose denominator is the total expenditures of the corporation for wages, salaries, commissions or other compensation to all of its employees.
(c) Of the remaining third, such portion shall be attributed to business carried on within this state as shall be found by multiplying said third by a fraction whose numerator is the amount of the corporation's gross receipts from business assignable to this state, and whose denominator is the amount of the corporation's gross receipts from all its business. * * *
(8) If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated to assign to this state the portion of net income reasonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation.'
Prior to the time of the controversy here involved, the Commission had promulgated a regulation, known as Regulation 8(4), wherein it determined that the statutory formula was not equitably applicable to mining companies, contractors, ranch and farm corporations and, therefore, a segregated accounting method was 'generally required' with regard to these businesses.
Subsection (6) of the above quoted statute does not purport to tax directly a corporation doing business both within and without the state on the net income which may be credited by a system accounting to business done within the state. Rather, it seeks to tax a percentage of the entire net income, wherever it may be earned, by a formula of apportionment composed of three distinct ratios and to attribute this portion to business carried on within this state. Justice Wolfe observed in California Packing Co. v. State Tax Commission: 1
'Hence, the net income is always to be found, not for a direct tax on it but to furnish the measure for the imposition of a franchise tax.'
The statutes of several states favor the separate accounting method over a formula allocation. 2 Our statute is just the reverse. It clearly expresses a preference for the statutory formula. 3 Our legislature has created a presumption that the statutory formula provided in subsection (6) will allocate the proportion of net income fairly and equitably attributable to this state. However, by reason of the federal constitutional prohibition of taxation by a state of extra-territorial income derived by a corporation from business conducted beyond its boundaries, the legislature wisely enacted subdivision (8) which grants authority to the Tax Commission to modify or disregard the statutory formula if it 'does not' allocate to the state the proportion of net income fairly and equitably attributable to this state.
There appear to be two limitations on the use of an apportionment formula. 4 First, it cannot be used to tax extra-territorial income that is not connected by unity of use with the business being taxed. 5 Second, the unitary character of a business will not justify a tax, imposed under a formula, which is grossly disproportionate to the business actually done in the taxing state. 6
In Butler Bros. v. McColgan 7 the issue, as in the instant case, was whether the corporate taxpayer must use a statutory allocation-formula or separate accounting to determine its taxable net income in the State of California. 8 The Supreme Court of California held that the nature of the business conducted within and without the state determined whether the allocation formula or separate accounting should be used to report the net income in the state. The court stated:
'* * * It is only if its business within this state is truly separate and distinct from its business without this state, so that segregation of income may be made clearly and accurately, that the separate accounting method may properly be used. * * *
'If there is any evidence to sustain a finding that the operations of appellant in California during the year 1935 contributed to the net income derived from its entire operations in the United States, then the entire business of appellant is so clearly unitary as to require a fair system of apportionment by the formula method in order to prevent overtaxation to the corporation or undertaxation by the state.'
The California court observed that the only limitation on the use of a formula in the allocation or apportionment of income of a unitary business is that the formula must not be intrinsically arbitrary or produce an unreasonable result. It concluded: '* * * it is our opinion that the unitary nature of appellant's business is definitely established by the presence of the following circumstances: (1) unity of ownership; (2) unity of operation as evidenced by central purchasing, advertising accounting and management divisions; and (3) unity of use in its centralized executive force and general system of operation.'
The United States Supreme Court, in affirming the Butler Bros. case, 9 stated:
'One who attacks a formula of apportionment carries a distinct burden by 'clear and cogent evidence' that...
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