Western Natural Gas Co. v. McDonald
| Decision Date | 09 November 1968 |
| Citation | 446 P.2d 781,202 Kan. 98 |
| Parties | WESTERN NATURAL GAS COMPANY, a Dissolved Corporation of the State of Delaware, Appellee, v. James T. McDONALD, Director of Revenue for the State of Kansas, Appellant. No 45146. |
| Court | Kansas Supreme Court |
Syllabus by the Court
1. The rights created by oil and gas leases covering land in Kansas constitute intangible personal property except when that classification is changed for a specific purpose by statute.
2. In construing and applying the present income tax law of Kansas the rights conferred by oil and gas leases constitute intangible personal property.
3. Under K.S.A. 79-3271(a) the controlling factor to determine business income is the nature of the particular transaction giving rise to the income.
4. Under the facts set forth in the opinion sale of oil and gas leases by a corporation under a complete plan of liquidation was not made in the regular course of taxpayer's business operation when measured by its former practices.
5. Under the facts set forth in the opinion it is held, the income from the sale of oil and gas leases constitutes non-business income from intangible personal property which is taxable at the commercial domicile of the corporation and the judgment is affirmed.
O. F. Baldwin, Topeka, and William L. Harris, Jr., Topeka, on the brief, for appellant.
Joseph W. Kennedy, Wichita, and Verne M. Laing, Ferd E. Evans, Jr., Ralph R. Brock, C. Robert Bell, Jr., Robert L. Driscoll and Robert I. Guenthner, Wichita, on the brief, for appellee.
This action involves the validity of an income tax assessment made by the director of revenue in the sum of $294,363.09. The district court set the assessment aside and entered judgment in favor of appellee. The director has appealed.
The action was tried on a stipulation of facts. The basic stipulations indicate Western Natural Gas Company was authorized and did business in Kansas and fourteen other states. Western was an integrated oil company. Its principal office from which the business was directed was in Houston, Texas. It was engaged in the exploration for, production, transportation, refining and marketing of petroleum products. Between 1941 and 1947 Western acquired a substantial acreage of oil and gas leases in Kansas. These leases were held for exploration and production and not for resale. No sale of lease acreage occurred from 1947, the time Western began business operations in Kansas, to 1963, the date of liquidation. The board of directors of the company adopted a plan for complete liquidation of the company. As required by the plan the holders of two-thirds of the common stock voted their approval. The entire property of the company was liquidated by sale in 1963. The company is now a dissolved corporation. Western realized $8,086,898 gain on the sale of its oil and gas leases on Kansas acreages.
The income tax return of the company for the year 1963 included gains from the sale of tangible equipment located on the leases in Kansas but did not include gains attributable to the sale of oil and gas leases. These gains were excluded on the theory they were non-business income from intangible personal property, taxable at the commercial domicile of the company in Texas.
The director of revenue made the assessment against the company and now contends these gains constituted business income taxable in Kansas.
In 1963 the legislature passed the Uniform Division of Income for Tax Purposes Act (K.S.A. 79-3271 et seq.). This act was passed to provide for uniform allocation and apportionment of the state income taxes of any taxpayer doing a multi-state business.
Pertinent provisions of the act read as follows:
K.S.A. 79-3271. 'As used in this act, unless the context otherwise requires:
'(a) '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.
'(b) 'Commercial domicile' means the principal place from which the trade or business of the taxpayer is directed or managed.
'(e) 'Non-business income' means all income other than business income.'
K.S.A. 79-3274 then provides for the allocation of non-business income as follows:
'Rents and royalties from real or tangible personal property, capital gains, interest, dividends, or patent or copyright royalties, to the extent that they constitute non-business income, shall be allocated as provided in sections 5 through 8 (79-3275 to 79-3278) of this act.'
K.S.A. 79-3276 specifically provides for the allocation of non-business capital gain income:
'(a) Capital gains and losses from sales of real property located in this state are allocable to this state.
'(b) Capital gains and losses from sales of tangible personal property are allocable to this state if
'(1) the property had a situs in this state at the time of the sale, or
'(2) the taxpayer's commercial domicile is in this state and the taxpayer is not taxable in the state in which the property had a situs.
'(c) Capital gains and losses from sales of intangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state.' (Emphasis supplied.)
We discern no discrepancy between the general provisions of K.S.A. 79-3202 (2), 79-3203(a), 79-3205(a) and the specific provisions of K.S.A. 79-3271 et seq. which relate to allocation and apportionment of income. The specific provisions relating to allocation appear decisive of the questions posed.
The rights created by oil and gas leases covering land in Kansas constitute intangible personal property except when that classification is changed for a specific purpose by statute. (Connell v. Kanwa Oil, Inc., 161 Kan. 649, 170 P.2d 631; Denver National Bank, etc. v. State Commission of Revenue & Taxation, 176 Kan. 617, 272 P.2d 1070.)
After the decision in Denver National Bank the legislature...
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