Wisconsin Dept. of Revenue v. Exxon Corp.

• Decision Date: 29 June 1979
• Docket Number: No. 76-751,76-751
• Citation: 281 N.W.2d 94,90 Wis.2d 700
• Parties: WISCONSIN DEPARTMENT OF REVENUE, Appellant, v. EXXON CORPORATION, Respondent.
• Court: Wisconsin Supreme Court

Page 94

281 N.W.2d 94

90 Wis.2d 700

WISCONSIN DEPARTMENT OF REVENUE, Appellant, v. EXXON CORPORATION, Respondent.

No. 76-751.

Supreme Court of Wisconsin.

Argued March 26, 1979.

Decided June 29, 1979.

Bronson C. La Follette, Atty. Gen., and John E. Armstrong, Asst. Atty. Gen., on brief, for appellant; Allan P. Hubbard, Asst. Atty. Gen., argued.

Foley & Lardner, Attys., Thomas G. Ragatz, of counsel(argued) Boardman, Suhr, Curry & Field, Attys., James F Lorimer, of counsel, Madison, McBride, Baker, Wienke & Schlosser, Lloyd M. McBride and Paul D. Frenz, of counsel, Chicago, Ill., and Joe O. Luby, Jr., of counsel, Exxon Corp., Houston, Tex., for respondent.

DAY, Justice.

This is an appeal and a cross-appeal in a corporate income and franchise tax case. The judgment from which this appeal is taken was entered in the circuit court for Dane County, January 31, 1977, the Honorable George R. Currie, presiding. The judgment was the result of a proceeding brought by the Department of Revenue, (hereafter Department) under ch. 227, Stats., to review a decision and order of the Wisconsin Tax Appeals Commission, (hereafter Commission) dated April 6, 1976. The Commission and modified the action of the Department denying Exxon's application for abatement of assessment of additional income and franchise taxes for the years 1965 through 1968. During the years in question, the taxpayer was the Humble Oil Refining Company, a wholly owned subsidiary of Standard Oil Company of New Jersey. In 1973, the parent company changed its name to Exxon Corporation, and Humble was merged into Exxon.

The following questions are presented by this appeal:

1. Were the taxpayer's Wisconsin operations an integral part of a unitary business within the meaning of sec. 71.07(2), Stats. (1967)?

2. Does the exclusion from taxation of situs income under the provisions of secs. 71.07(1) and (2), Stats., (1967) apply to all income derived from the production of crude oil and natural gas, or only to that income derived from sales to third parties at or near the well-head?

3. In applying the statutory apportionment formula of sec. 71.07(2), Stats., (1967), did the Department properly weight the cost of manufacturing factor by employing a divisor of 2.6, instead of 3?

We hold that the taxpayer's Wisconsin operations constituted an integral part of a unitary business, subject to statutory apportionment of its income. We also uphold the Department's interpretation of the situs income exclusion to apply only to income derived from sales to third parties at or near the well-head. Finally, for reasons discussed below, we remand the question of the weighting of the apportionment formula to the Commission for further proceedings.

The taxpayer is a corporation organized under the laws of Delaware, with its general offices located in Houston, Texas. This case deals only with the years 1965 through 1968. During that time, Humble Oil and Refining Company was a wholly owned subsidiary of Standard Oil Company of New Jersey. In 1956, Standard Oil of New Jersey organized a wholly owned Delaware subsidiary which then acquired all of the assets and liabilities of Saxon Corporation, a Wisconsin corporation formerly named Pate Oil Company. The new subsidiary continued the operations of the former Wisconsin company, under the name of Pate Oil Company, which consisted of marketing petroleum products and accessories in Wisconsin. Corporate income tax reporting to the State of Wisconsin was done on the basis of separate accounting which reflected only the Wisconsin marketing operations. In 1960, Standard Oil of New Jersey caused the new Pate Oil Company to be merged into Humble Oil and Refining Company, and Humble continued the Wisconsin marketing operations under the brand name of Enco. In 1973, Humble was merged into Standard Oil of New Jersey, and the parent company's name was changed to Exxon. Exxon is the legal successor to Humble.

Humble timely filed its Wisconsin corporation income and franchise tax returns for the calendar tax years 1965 through 1968, using the separate accounting method. The returns showed losses in the amounts of $821,320; $1,159,830; $1,026,224; and $919,575, respectively for the years 1965, 1966 1967 and 1968. No tax was shown as being due for those years.

The Department audited Humble for the tax years 1965 through 1968, and on June 25, 1971, the Department forwarded to Humble notice of assessment of additional income and franchise tax. The notice was appended to the Department's audit report, in which the auditor stated that Humble's income was subject to apportionment, thus subjecting it to tax on additional income of $4,532,155 for the period 1965 through 1968. Additional taxes in the amount of $316,470.85 were assessed against Humble.

Humble filed an application for abatement of the assessment, which was denied by the Department. Proceedings were held before the Wisconsin Tax Appeals Commission, which modified the Department's action of Humble's application for abatement by a decision and order dated April 8, 1976. The Commission found that Humble's three main functional operating departments exploration and production, marketing, and refining were each unitary businesses. The Commission decided that the Department had properly refused to permit Humble to report its income by the separate accounting method, that for the years in dispute, Humble was operating a multi-state unitary marketing business within the meaning of sec. 71.07(2), Stats., and that Humble's Wisconsin marketing operation was an integral part of that marketing business. However, the Commission also found that Humble's Wisconsin marketing operations were not an integral part of either Humble's exploration and production function or refining function, and that there was no economic dependence between Humble's Wisconsin marketing operations and the exploration and production and refining functions. Thus, the commission concluded that the Department could not use the statutory apportionment formula to reach income from Humble's refining and exploration and production departments.

On review under ch. 227, the Circuit Court for Dane County set aside some of the findings of the Commission. Judge Currie, in his opinion, stated that the following findings of fact were actually erroneous conclusions of law and set them aside:

"19. The petitioner's three main functional operating departments, exploration and production, marketing, and refining, were each unitary businesses.

"21. During the period involved herein, there was no economic dependence between the petitioner's Wisconsin marketing operations and its exploration and production function.

"23. During the period involved herein, there was no economic dependence between the petitioner's Wisconsin marketing operations and its refining function."

The trial court also set aside the following conclusions of law made by the Commission:

"3. During the years in issue, the petitioner was operating a multistate unitary marketing business within the intent and meaning of Section 71.07(2) of the Wisconsin Statutes, and the petitioner's Wisconsin marketing operation was an integral part thereof.

"6. The apportionment formula used by the respondent in the audit and assessment here under review was improper in including income from petitioner's exploration, production and refining departments, and resulted in assessing a tax on extraterritorial income earned by the petitioner.

"7. An apportionment formula, apportioning income earned by the petitioner from its marketing function within and without the State of Wisconsin, would be proper and within the intent and meaning of the statutory mandate contained in Section 71.07(2) of the Wisconsin Statutes."

However, the trial court also held that the Department's interpretation of the situs exclusions of secs. 71.07(1) and (2) to exclude from taxation only Humble's income from crude oil and gas sold to third persons at the situs of origin, thus subjecting the remainder of situs income to taxation through application of the apportionment formula would be unfair and violative of the intent of sec. 71.07. The trial court also approved the Department's weighting of the costs of manufacturing aspect of the apportionment formula to provide for a divisor of 2.6, instead of 3, as prescribed in the statute.

The Department appeals only from that portion of the judgment which determined that the Department must exclude all situs income derived from the production of crude oil and gas, whether or not sold to third parties. Exxon appeals from those aspects of the judgment which determined that Humble's total business within and without Wisconsin constituted a unitary business, and which permitted the Department to weight the costs of manufacturing component of the apportionment formula.

QUESTION # 1: WERE THE TAXPAYER'S WISCONSIN OPERATIONS AN INTEGRAL PART OF A UNITARY BUSINESS WITHIN THE MEANING OF SEC. 71.07(2), STATS. (1967)?

This case brings into play several sections of ch. 71, Stats., (1967):

"71.01 Imposition of tax; exempt income . . . . (2) Franchise tax on corporations. For the privilege of exercising its franchise or doing business in this state in a corporate capacity every domestic or foreign corporation, except corporations specified in sub. (3), shall annually pay a franchise tax according to or measured by its entire net income of the preceding income year at the rates set forth in s. 71.09 (2am). Every corporation organized under the laws of this state shall be deemed to be residing within this state for the purposes of this franchise tax. All provisions of chs. 71 and 73 relating to net income taxation of corporations shall apply to franchise taxes imposed under this subsection, unless the context requires otherwise. The tax imposed by this subjection on national banking associations shall be in lieu of all taxes imposed by this state on national banking associations to...