BEFORE THE UTAH STATE TAX
COMMISSION
____________________________________
XXXXX, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
Petitioner, : AND FINAL DECISION
:
v. :
:
AUDITING
DIVISION OF THE : Appeal No. 90-1521
UTAH STATE TAX COMMISSION, :
: Tax:
Corporate Franchise
Respondent. :
____________________________________
STATEMENT OF CASE
This
matter came before the Utah State Tax Commission for formal hearing held XXXXX
through XXXXX, XXXXX. XXXXX,
Administrative Law Judge, Chairman W. Val Oveson, Commissioner Joe B. Pacheco,
Commissioner Alice Shearer, and Commissioner Roger O. Tew heard the matter.
Present and representing Petitioner, XXXXX, ("XXXXX") were XXXXX, and
XXXXX, from the law firm of XXXXX, and XXXXX, from the law firm of XXXXX. Present and representing the Auditing
Division of the Utah State Tax Commission ("Auditing Division") were
XXXXX and XXXXX, Assistant Attorneys General.
XXXXX, former XXXXX of XXXXX, XXXXX, former XXXXX of XXXXX, XXXXX,
Professor of XXXXX at XXXXX, and XXXXX, Certified Public Accountant of XXXXX,
the auditors for XXXXX and XXXXX, appeared as witnesses for Petitioner. XXXXX, auditor for the Auditing Division and
Professor XXXXX of XXXXX appeared as witnesses for the Respondent.
FINDINGS OF FACT
1. The tax at issue is corporate franchise tax
for the years XXXXX and XXXXX.
2. XXXXX is a single corporate entity which
operates in all states and several foreign countries. It owns majority interests in XXXXX other corporations and files
a federal consolidated tax return with those majority owned corporations. In several states, XXXXX has filed combined
returns with the same entities.
3. XXXXX filed its XXXXX and XXXXX U.S.
Corporation Income Tax Returns (Form 1120) on a consolidated basis. In XXXXX, XXXXX consolidated its income with
XXXXX of its domestic subsidiaries and affiliates. In XXXXX, XXXXX consolidated its income with XXXXX of its
domestic subsidiaries and affiliates. XXXXX
was not one of the companies included in XXXXX consolidated returns.
4. XXXXX filed its XXXXX and XXXXX Utah
Corporation Franchise or Income Tax Returns (Form TC-20) on a combined basis
with the corporations included in the federal returns.
5. XXXXX did not, and was not required to,
include the income of XXXXX in its combined report for Utah income tax
reporting purposes, since XXXXX did not own more than %%%%% of the stock of
XXXXX.
6. On its XXXXX and XXXXX Utah returns,
dividends received from XXXXX were included in apportionable business income.
7. On its XXXXX Utah return, in calculating its
net income, XXXXX subtracted $$$$$ on line 4(d). This subtraction was described as "Extraordinary gain on
sale of entire XXXXX stockholding (%%%%%)."
8. XXXXX business activities are divided into
three operating divisions named XXXXX, XXXXX, and XXXXX which constitute three
separate lines of business. Each
division has its own officers, employees, manufacturing facilities, and sales
staff. Each division produces its own
line of products which are marketed by its sales staff. XXXXX business activity in Utah was
conducted through XXXXX. However, the
three operating divisions are not separate corporations, but are all just a
part of a single legal entity, i.e., XXXXX.
9. XXXXX headquarters in XXXXX provides administrative
services to all three divisions. The
XXXXX company provides some of its own administrative services.
10. XXXXX corporate organization included
corporate headquarters offices or departments in addition to its three
divisions. Such headquarters offices
and departments included the Office of the President, international operations,
finance and control department (which was “subdivided” into audit, banking,
controller, treasurer, insurance, computer services, credit and tax), general
counsel, secretary, business development department (which included research,
marketing, special projects and licensing), human resources department (which
included health, environment and safety services, salary planning, and
recruiting), productivity management and operation services (which included
distribution and supply, advanced office systems, and management support
systems), and information resources.
These headquarters offices and departments each provided various services
to each of the three divisions of XXXXX.
11. XXXXX is in the business of manufacturing.
12. During its XXXXX year history, XXXXX has
participated as a partner in more than XXXXX joint ventures with various
partners.
13. In the late XXXXX's and early XXXXX's, under
the leadership of Chairman, President, and CEO, XXXXX, XXXXX began
restructuring. Its strategy was to
reduce dependence on petrochemicals and other commodity chemicals, and increase
its role as a supplier of value-added products. In carrying out this strategy, XXXXX made creative use of joint
ventures to manage and, in some cases, divest its commodity chemicals business.
14. XXXXX resins are derived from
petrochemicals.
XXXXX
15. Prior to XXXXX, XXXXX, XXXXX owned and
operated XXXXX resin manufacturing facilities located at XXXXX, XXXXX; XXXXX,
XXXXX; XXXXX, XXXXX; XXXXX, XXXXX; XXXXX, XXXXX, XXXXX; and XXXXX, XXXXX. XXXXX manufactured many grades and types of
XXXXX which were used primarily in the manufacture of various plastic products
in the automotive, fiber, packaging, housewares, and appliance industries as
well as miscellaneous uses in other industries.
16. From the early XXXXX's, XXXXX primary
objective for XXXXX was the enhancement of its value, for ultimate disposition.
17. In XXXXX, XXXXX ("XXXXX"), an
XXXXX company, together with XXXXX of XXXXX, had developed an advanced
catalyst-based technology for the manufacture of XXXXX. The XXXXX technology consisted of a chemical
“XXXXX” process named the ”XXXXX”, which enabled the manufac ture of XXXXX with
a wider range of properties and at a lower cost than the processes XXXXX then
used.
18. On or about XXXXX, XXXXX and XXXXX formed
XXXXX ("XXXXX") as a joint venture.
19. The formation of the XXXXX joint venture
during XXXXX combined XXXXX's superior technology with XXXXX marketing
strengths and presence in the North American markets.
20. XXXXX financial interest in the XXXXX joint
venture was not a short-term investment of working capital.
21. Upon its formation, and until XXXXX, XXXXX,
XXXXX and XXXXX each held XXXXX percent of the stock of XXXXX and were XXXXX's
only shareholders.
22. At XXXXX's formation, XXXXX contributed
substantially all of its XXXXX resin assets and technology to XXXXX. XXXXX contributed its XXXXX resin assets and
technologies to XXXXX at its formation.
XXXXX also contributed assets which it had purchased from XXXXX XXXXX
and XXXXX subsidiaries. These purchases
were made by XXXXX so that the contributions of XXXXX and XXXXX to XXXXX would
be more equal in value.
23. Under the XXXXX Agreement, at Section XXXXX,
XXXXX and XXXXX agreed that the working capital related to the XXXXX XXXXX
resin assets being contributed to XXXXX exceeded the working capital assets
related to the XXXXX XXXXX resin assets being contributed to XXXXX. XXXXX and XXXXX agreed that the differential
between the working capital of the XXXXX XXXXX resin assets and the working
capital of the XXXXX XXXXX resin assets would be equalized by XXXXX issuing a
note to XXXXX, on the closing date of the XXXXX formation transaction, in an
amount that was later determined by the parties to be $$$$$.
24. XXXXX received a $$$$$ dollar note from
XXXXX for its transfer of working capital assets, including inventory and
accounts receivable, to XXXXX at its formation.
25. On XXXXX, 19YY, all XXXXX employees who had
previously been directly and solely engaged in manufacturing or marketing XXXXX
terminated their employment at XXXXX and accepted employment with XXXXX. None of these employees were ever re-employed
by XXXXX.
26. XXXXX is a separate independent corporation
whose activities are limited to one line of business, the manufacture and sale
of XXXXX. XXXXX was created by XXXXX
and XXXXX selling all of their respective XXXXX manufacturing assets to XXXXX
and transferring all employees associated with this line of business to XXXXX
in exchange for equal shares of XXXXX’s stock.
27. XXXXX and XXXXX entered into an agreement
regarding the governance of XXXXX under the terms of which the shareholders’ interest
would be equally balanced and the president of XXXXX would run the company and
seek XXXXX’s independent profit objectives.
28. XXXXX and XXXXX also agreed to sell certain
administrative services to XXXXX at their fully loaded cost.
29. In forming XXXXX, XXXXX and XXXXX agreed
that they would not, except under limited conditions or with the consent of the
other party, sell, assign, or pledge their XXXXX stock.
30. XXXXX and XXXXX each had and exercised
authority to elect three of the six members of the board of Directors of XXXXX.
31. Each member of XXXXX’s Board of Directors
elected by XXXXX also served as officers and/or directors of XXXXX.
32. XXXXX and XXXXX agreed that the primary
responsibility for the worldwide operations of XXXXX would be vested in the
president of XXXXX. The president would
also serve as XXXXX’s chief operating officer.
The parties agreed that XXXXX would select and, if appropriate, dismiss
the president of XXXXX, in each case with the concurrence of XXXXX’s Board of
Directors, for the first five years.
33. XXXXX and XXXXX agreed that they would vote
their shares in the company or otherwise instruct the directors of XXXXX
elected by them to act in such a way as to assure that the primary
responsibility of the operation of the company worldwide was vested in its
president.
34. XXXXX and XXXXX agreed that XXXXX would also
select the Chairman, and XXXXX would select the Vice Chairman, of XXXXX’s Board
of Directors for the first five years of the joint venture. XXXXX selected Mr. XXXXX, its own Chairman
of the Board, to be President, CEO, and Chairman of XXXXX’s Board of Directors.
35. XXXXX and XXXXX agreed that after the first
five years, the selection of the Chairman and Vice Chairman would rotate
between XXXXX and XXXXX every three years with the choice of the selecting
party subject to the concurrence of XXXXX’s Board of Directors, except when the
person selected was the Chairman of the Board or the Chief Executive Officer of
the selecting party.
36. XXXXX and XXXXX agreed that XXXXX would
nominate two of the vice presidents of XXXXX, while XXXXX would nominate the
other two. The appointment of such
persons would be with the concurrence of the president of XXXXX.
37. XXXXX and XXXXX agreed that XXXXX would nominate
the head of the North American operations of XXXXX, while XXXXX would nominate
the head of the European operations.
All appointments were to be with the concurrence of the president of
XXXXX. XXXXX and XXXXX agreed that
after the initial selection of these persons, replacements and the appointment
of other heads of equal rank would be made to generally follow the principle of
balanced representation between XXXXX and XXXXX. Other key officials of XXXXX and its subsidiaries would be
selected by the president of XXXXX after consultation with XXXXX and XXXXX.
38. XXXXX and XXXXX agreed that XXXXX was to
pursue its independent profit objectives.
39. XXXXX and XXXXX initially agreed to purchase
all of their XXXXX resin needs from XXXXX as long as XXXXX met quality and
product property requirements.
40. XXXXX and XXXXX agreed that XXXXX’ and
XXXXX’s purchases from XXXXX would be at a discount from market price “to
recognize the fact that the selling and other indirect expenses will be less
for sales to the parent of the venture than that incurred in the open
marketplace.”
41. The amounts of XXXXX and its subsidiaries'
net sales of XXXXX to XXXXX, and the percentages of those net sales as compared
with total revenues of XXXXX and its subsidiaries, for the years 19YY through
19YY are set forth in the following table:
Table A
Intercompany Sales of XXXXX from XXXXX to
XXXXX
19YY-19YY
as a Percentage of Total XXXXX
Sales
($
millions)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
XXXXX's ³ XXXXX Sales ³ Total XXXXX Sales
Fiscal Year ³ to
XXXXX ³ (% to XXXXX)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³$$$$$ ³$$$$$
³ ³(%%%%%)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³$$$$$ ³$$$$$
³ ³(%%%%%)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³$$$$$ ³$$$$$
³ ³(%%%%%)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³$$$$$ ³$$$$$
³ ³(%%%%)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³$$$$$ ³$$$$$
³ ³(%%%%%)
42. XXXXX also made purchases of XXXXX resin from
the other producers, including XXXXX and XXXXX, at some times during 19YY
through 19YY.
43. Under the terms of the Services Agreements
and the XXXXX Sales Agreement, either agreement could be terminated by either
party upon written notice. The Service
Agreement was terminable upon three (3) months notice and the XXXXX Supply
Agreement was terminable upon six (6) months notice.
44. XXXXX and XXXXX agreed to cooperate with XXXXX
in making available raw materials to XXXXX, providing operating services or
utilities to XXXXX, and in purchasing operating services or utilities from
XXXXX. It was agreed that purchases and
sales of operating services or utilities between XXXXX and its parents would be
based on the recovery of actual costs.
45. XXXXX ("XXXXX"), a domestic
subsidiary of XXXXX, and XXXXX entered into a Services Contract whereby XXXXX
would provide research and development services, accounting and financial
support, management services, and health, environment, and safety services to
XXXXX, in return for reimbursement of XXXXX's costs of such services.
46. XXXXX and XXXXX entered into a Corporate
Auxiliary Services Contract whereby XXXXX would provide legal services, health,
environmental, and safety services, human resource services, controller's
department services, treasurer's services, audit services, advanced office
systems services, management service support, and research and development
services to XXXXX, in return for reimbursement of XXXXX's costs.
47. XXXXX and XXXXX also entered into a
Corporate Auxiliary Services Contract whereby XXXXX would provide health,
environmental, and safety services, human resource services, transportation
services, purchasing services, controller's department services, treasurer's
services, Computer Systems Department services, advanced office systems
services, marketing services, operations services, management service support,
corporate quality assurance services, and Development Department services to
XXXXX, in return for reimbursement of XXXXX's costs.
48. The provision of services by XXXXX for XXXXX
and its subsidiary provided the infrastructure necessary for the joint venture
to begin operations immediately upon the formation of the joint venture.
49. From XXXXX's creation through 19YY, XXXXX
rented office space to XXXXX in XXXXX, XXXXX's corporate headquarters building,
in XXXXX, XXXXX. The property was
rented under the terms of the Corporate Auxiliary Services Agreement.
50. The amounts which XXXXX paid XXXXX, and
which XXXXX paid XXXXX, pursuant to the Corporate Auxiliary Services Agreement
and the Services Agreement for the fiscal years 19YY through 19YY are set forth
in the following table:
Table
B
Service
Transactions Between
XXXXX
& XXXXX 19YY-19YY
($
millions)
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÂÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
³ ³
³ XXXXX's ³ XXXXX'
³ Payments
to ³ Payments to
Year ³ XXXXX ³ XXXXX
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³ XXXXX ³ XXXXX
³ ³
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³ $$$$$ ³ $$$$$
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³ $$$$$ ³ $$$$$
ÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄÄÅÄÄÄÄÄÄÄÄÄÄÄÄÄÄ
19YY ³ $$$$$ ³ $$$$$
³ ³
51. Subsequent to the formation of XXXXX, XXXXX
continued to fabricate XXXXX film and fibers for numerous applications using
XXXXX.
52. During 19YY and 19YY XXXXX agreed to sell
XXXXX to XXXXX and XXXXX at market prices less a negotiated discount for volume
sales and to recognize the reduced marketing expenses XXXXX would incur in
making sales to XXXXX and XXXXX.
53. On or about XXXXX, 19YY, XXXXX underwent an
initial public stock offering. This
constituted the final step toward XXXXX's planned ultimate disposition of its
XXXXX business and allowed the markets to value XXXXX's accomplishments.
54. As a result of the public offering, both
XXXXX's and XXXXX's ownership interests were diluted to approximately %%%%% and
XXXXX's common stock was listed on the New York Stock Exchange.
55. Following the public offering, XXXXX could
elect three members and XXXXX could elect three members to XXXXX’s eleven
member Board of Directors.
56. In XXXXX 19YY, after XXXXX had refused to
sell its XXXXX stock to XXXXX, XXXXX threatened a hostile takeover of XXXXX if
XXXXX did not agree to sell its XXXXX stock to XXXXX. As a result of the hostile takeover threat, XXXXX entered into an
agreement with XXXXX to sell its XXXXX stock to them.
57. On or about XXXXX, 19YY, XXXXX sold its
stock in XXXXX to XXXXX at a negotiated price of $$$$$ per share and realized a
gain of $$$$$.
58. During the audit period, XXXXX did not have
any operations, plants, property or employees in Utah. XXXXX did not sell XXXXX to XXXXX in Utah, but
it does sell a substantial portion of its products to other Divisions of XXXXX,
and such other Divisions were all part of the same legal entity and same
financial enterprise (XXXXX) as XXXXX.
59. XXXXX’ ownership of XXXXX stock was intended
to be and was treated as an operational function to provide materials and
supplies to the various divisions of XXXXX.
That source of supply served a vital function in the day-to-day
operations of one or more operating divisions of XXXXX.
XXXXX' Internal Organization
60. During 19YY and 19YY, XXXXX had an
organizational scheme with three divisions named XXXXX, XXXXX, and XXXXX. The divisions were not separate
corporations, but were all part of the single legal entity.
61. XXXXX's corporate organization included corporate
headquarters offices or departments in addition to its three divisions. Such headquarters offices and departments
included the office of the president, international operations, finance and
control department (which was "subdivided" into audit, banking,
controller, treasurer, insurance, computer services, credit and tax), general
counsel, secretary, business development department (which included research,
marketing, special projects and licensing), human resources department (which
included health, environment and safety services, salary planning, and
recruiting), productivity management and operation services (which included
distribution and supply, advanced office systems, and management support
systems), and information resources.
These headquarters offices and departments each provided various
services to each of the three divisions of XXXXX.
62. XXXXX's general corporate departments
provided services directly to the XXXXX division including preparation and
issuance of payroll checks, issuance of payments to vendors, preparation of tax
returns incorporating the XXXXX division's information, preparation of
financial reports incorporating the XXXXX division's information, industrial
relations services, and benefit administration services.
63. XXXXX's corporate legal department provided
general corporate services for the XXXXX division. The lawyers in the corporate legal department were available to
consult with lawyers in the XXXXX division, and that attorneys in XXXXX's
corporate legal department prosecuted patents for inventions of employees of
the XXXXX division.
64. Synergies existed between XXXXX's XXXXX
activities and its other divisions in research and development efforts. For example, the 19YY Annual Report
documents efforts of XXXXX's XXXXX (another one of XXXXX's three divisions) to
integrate XXXXX composite technology into other applications. Exhibit J-16 at 23. The 19YY Annual Report, mentioning that
"[t]echnical skills . . . are very often readily transferable," notes
"collaborative efforts of polymer chemists at [XXXXX's] central research
facility and materials scientists at XXXXX." Exhibit J-19 at 18.
Likewise, efforts to develop an on-line sensor for the paper industry is
described as "the combined work" of several groups, including those
involved with XXXXX. Exhibit J-19 at
18.
65. Though filing returns during the audit
period in every state which imposes a corporate franchise or income tax, XXXXX
did not file any state tax return on which it accounted separately for the
income of its three divisions, i.e., the income from all three Divisions was
included on the one return of XXXXX.
66. XXXXX, as a corporation, benefits from
centralized management, economies of scale, functional integration, and flows of
value, and flows of products between its corporate departments and divisions.
67. XXXXX, as a corporation, conducts a unitary
business which includes its XXXXX operations along with the operations of its
other divisions.
68. A portion of XXXXX's unitary business is
conducted in Utah.
The Utah Audit
69. The Auditing Division issued a Preliminary
Notice dated XXXXX, 19YY, and a Statutory Notice of Deficiency dated XXXXX,
19YY, both of which addressed XXXXX's tax returns for calendar years 19YY,
19YY, and 19YY.
70. For calendar year 19YY, the Auditing
Division did not make any adjustment to XXXXX's treatment of the XXXXX dividend
as apportionable business income.
71. For calendar year 19YY, the Auditing
Division disallowed XXXXX's subtraction of $$$$$ from its federal taxable
income in computing net income. This
subtraction was described as "Extraordinary gain on sale of entire XXXXX
stockholding (%%%%%)." The
Auditing Division noted that there is no statutory provision supporting XXXXX's
subtraction of this gain in arriving at net income. The disallowance of this subtraction resulted in apportionable
income being increased by the same amount.
The Auditing Division did not make any adjustment to XXXXX's treatment
of the XXXXX dividend as apportionable business income in 19YY.
Administrative Proceedings
72. On XXXXX, 19YY, XXXXX timely filed a
Petition for Redetermination and Request for Agency Action
("Petition") with the Tax Commission.
73. On XXXXX, 19YY, the Auditing Division timely
filed an Answer to XXXXX's Petition.
74. On XXXXX, 19YY, XXXXX filed an Amended
Petition with the Tax Commission.
75. On XXXXX, 19YY, XXXXX made partial payment
to the Auditing Division for amounts which XXXXX claimed to be uncontested.
76. On XXXXX, 19YY, the Commission issued an
Order which approved a settlement which the parties had reached for the 19YY
deficiency. All issues related to 19YY
have now been settled.
77. The Auditing Division issued a Second
Statutory Notice of Deficiency dated XXXXX, 19YY, which reflected the
settlement of tax year 19YY and made a minor change in the 19YY deficiency.
78. On XXXXX, 19YY, XXXXX submitted a Third
Amended Petition to the Tax Commission.
XXXXX was granted permission to file the Third Amended Petition by Order
dated XXXXX, 19YY.
79. During the course of the formal hearing, the
parties agreed to, and the Tax Commission verbally approved, the settlement of
all outstanding non-XXXXX issues in this appeal.
80. Though filing returns during the audit
period in every state which imposes a corporate franchise or income tax, XXXXX
did not file any state tax return on which it accounted separately for the
income of its three divisions.
81. The allocable share of income sought to be
taxed by Respondent has not been taxed by any other state, so the efforts of
Respondent will not result in “double taxation” of any such amounts of income.
APPLICABLE LAW
A
tax is imposed at the rate of five per cent on the Utah taxable income of each domestic
and foreign corporation on income derived from sources within this state. (Utah
Code Ann. §59-7-104 and §59-7-201).
"Business
Income" is required to be apportioned by Utah Code Ann. §59-7-303, which
provides:
(1) Any taxpayer
having income from business activity which is taxable both within and without
this state shall allocate and apportion its adjusted income as provided in this
part.
(2) Any taxpayer
having income solely from business activity taxable within this state shall
allocate or apportion its entire adjusted income to this state.
If
a business operates in more than one state, the business income of that
business is apportioned among the various states by the Uniform Division of
Income for Tax Purposes Act ("UDITPA"). Utah Code Ann. §59-7-311, is a part of that act, and provides for
the apportionment of business income to the various states based upon a three
factor formula, as follows:
All business income
shall be apportioned to this state by multiplying the income by a fraction, the
numerator of which is the property factor plus the payroll factor plus the
sales factor, and the denominator of which is three.
"Business
Income" is defined by Utah Code Ann. §59-7-302 as:
(1) "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 constitutes integral parts of the taxpayer's regular trade or business
operations.
"Nonbusiness
Income" is defined by Utah Code Ann. §59-7-302 as:
(4) "Nonbusiness
income" means all income other than business income.
To
assist in determining whether income is business income or nonbusiness income, the
Commission has adopted RuleR865-6F-8, Utah Code of Administrative Procedure,
which provides in relevant part, as follows:
A. Business and Nonbusiness Income Defined. Utah Code Ann. Section 59-7-302(a) defines business income as
income arising from transactions and activity in the regular course of the
taxpayer's trade or business operations.
In essence, all income which arises from the conduct of trade or
business operations of a taxpayer is business income. For purposes of administration of the Uniform Division of Income
for Tax Purposes Act, the income of the taxpayer is business income unless
clearly classifiable as nonbusiness income.
1. Non business income
means all income other than business income and shall be narrowly construed.
Income of any type or class
and from any source is business income if it arises from transactions and
activity occurring in the regular course of a trade or business. Accordingly, the critical element in
determining whether income is business income or nonbusiness income is the
identification of the transactions and activity which are the elements of a
particular trade or business. In
general all transactions and activities of the taxpayer which are dependent
upon or contribute to the operation of the taxpayer's economic enterprise as a
whole constitute the taxpayer's trade or business and will be transactions and
activity arising in the regular course of, and will constitute integral parts
of a trade or business.
The
determination of whether capital gains and losses are allocable to this state is made by Utah Code Ann. §59-7-308,
which provides:
To the extent that the
following constitute nonbusiness income:
(1) capital gains and
losses from sales of real property located in this state are allocable to this
state:
(2) capital gains and
losses from sales of tangible personal property are allocable to this state if:
(a) the property had a
situs in this state at the time of the sale; or
(b) 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; and
(3) 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.
Parts
of RuleR865-6F-8, Utah Code of Administrative Procedure, deal with the
classification of specific types of income, and with respect to gains and
losses from the sale of assets, it provides:
3. Business and
Nonbusiness Income, Application of Definitions--The following are rules for
determining whether particular income is business or nonbusiness income:
*****
(b) Gains or Losses
from Sales of Assets. Gain or loss from
the sale, exchange or other disposition of real or tangible or intangible
personal property constitutes business income if the property while owned by the taxpayer was used in the
taxpayer's trade or business. However,
if such property was utilized for the production of nonbusiness income the gain
or loss will constitute nonbusiness income.
"Commercial
Domicile" is defined by Utah Code Ann. §59-7-302, as:
(2) "Commercial
domicile" means the principal place from which the trade or business of
the taxpayer is directed or managed.
RuleR865-6F-8,
Utah Code of Administrative Procedure, provides the following relevant
definitions:
2. Apportionment
refers to the division of business income between states by the use of a
formula containing apportionment factors.
3. Allocation refers
to the assignment of nonbusiness income to a particular state.
4. Business activity
refers to the transactions and activity occurring in the regular course of the
trade or business of a taxpayer.
Utah Code Ann.
§59-7-311 (1992) provides:
All
business income shall be apportioned to this state by multiplying the income by
a fraction, the numerator of which is the property factor plus the payroll
factor plus the sales factor, and the denominator of which is three.
ANALYSIS AND CONCLUSIONS OF
LAW
The
issue to be decided in this case is whether XXXXX's gain on the sale of its
interest in XXXXX constitutes business income, a portion of which may be taxed
by Utah.
The
test for whether income is business income or nonbusiness income is established
by Utah Code Ann. §59-7-302.
Business
income is defined as:
(1) “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 constitutes integral
parts of the taxpayer’s regular trade or business operations.
Most
states have a provision defining business income in almost identical words, and
while the number of decisions in this state are minimal, there are several
decisions from other states. Those
court decisions have discussed the definition of business income as containing
a transactional test and a functional test.
The transactional test is set forth by the words “income arising from
transactions and activity in the regular course of the taxpayer’s trade or
business.” The functional test is set
forth by the words “includes income from tangible and intangible property if
the acquisition, management and disposition of the property constitutes
integral parts of the taxpayers regular trade or business operations.” Some court decisions are at variance over
whether a particular form of income must meet both the transactional test and
the functional test before it is classified as business income, or whether
compliance with either the transactional test or the functional test is
sufficient for the income to constitute business income.
This
Commission has on two prior occasions had an opportunity to rule on whether
both the transactional test and the functional test are required, or whether
the meeting of either test is sufficient for the income to constitute business
income. Those two cases are appeal
numbers 90-1607 and 93-0481. In appeal
number 90-1607, in a decision issued on XXXXX, 19YY, the Commission made the
following statement:
“The Petitioner
further argues that both elements of the foregoing test must be met before the
income in question is “business income.”
However, in the Commission’s view, the foregoing statutory definition
only requires that either portion of the definition be met. Petitioner concedes that the personal
property in question is integral and a part of its business operations. The Commission therefore concludes that gain
on sale of such property is business income for purposes of Utah’s Corporate
Franchise and Tax Act.”
In
appeal number 93-0481, the Commission also ultimately used a single factor to
find that the income was business income, and stated as follows:
“Resolution of this
matter must begin with an analysis of the statute. The first phrase of the statutory definition of business income
includes “income arising from transactions and activity in the regular course
of the taxpayer’s trade or business.”
This language lends itself to a transactional analysis which focuses on
the performance of a specific function in the normal, typical, or customary
procedure of the taxpayer’s trade or business.
The second phrase
includes income from “tangible and intangible property if the acquisition,
management and disposition of the property constitutes integral parts of the
taxpayer’s regular trade or business operations.” This language lends itself to a functional test wherein all gain
from property’s business income is included if the property were used by the
taxpayer in its regular trade or business. Under this analysis the
infrequency or the extraordinary nature of the transaction is irrelevant. The transaction itself need not reflect the
taxpayer’s normal trade or business under the functional test; gain from the
sale of assets constitutes business income if the assets themselves were used
to generate business income. Under
this approach, gain or loss from the sale of a business constitutes business
income or loss if the assets sold were used by the taxpayer in its unitary
business to produce business income.” (Emphasis added)
The
functional test of the business income definition looks to the relationship
between the asset producing the income and the trade or business of the
taxpayer, i.e. the function which the asset serves in the taxpayer's business.
Prior
to the formation of XXXXX, XXXXX's XXXXX resin assets were used by XXXXX in the
generation of business income.
Likewise, expenses related to these assets, including depreciation of
the assets, reduced XXXXX's business income.
XXXXX then contributed these assets to the XXXXX joint venture in
exchange for XXXXX percent of the stock of XXXXX. The XXXXX stock was much more than a passive investment to
XXXXX. The XXXXX joint venture was a
continuation of the prior XXXXX resin business of XXXXX and the new entity
provided the vehicle for XXXXX to enhance the value of its XXXXX business
through use of XXXXX's superior technology.
This enhancement of value fit squarely within XXXXX stated primary
business objective of enhancing the value of the assets prior to ultimate
disposition. The XXXXX joint venture
provided XXXXX with access to a source of XXXXX, for use in the business of
XXXXX, being produced at lower costs than those previously incurred by XXXXX.
XXXXX'
Chairman of the Board, President, and CEO, XXXXX, became XXXXX's Chairman of
the Board, and other officers and directors of XXXXX also served on XXXXX's
Board of Directors. XXXXX appointed
XXXXX's President who had the primary responsibility for the worldwide
operations of XXXXX. XXXXX also
provided XXXXX with the necessary infrastructure to enable the joint venture to
begin its operations immediately upon its formation and take advantage of an
upswing in the XXXXX market. Within the
meaning of the statute, XXXXX's acquisition, management, and disposition of its
XXXXX assets and its interest in XXXXX, and use of the products of XXXXX,
constituted integral parts of its regular trade or business operations.
The
property disposed of was used by XXXXX in its regular trade or business
operations. Income from the sale of
business assets produces business income or loss. This meets the functional test.
The income from the sale of XXXXX was business income subject to
apportionment.
XXXXX
has asserted that XXXXX and XXXXX must be unitary for the gain from the sale of
its interest in the XXXXX joint venture to be apportioned to Utah. This assertion is without merit. As the Supreme Court has stated in Allied-Signal
v. Director, Div. of Taxation, 504 U.S. 768, 119 L.Ed.2d 533 (1992),
"the payee and the payor need not be engaged in the same unitary business
as a prerequisite to apportionment in all cases. . . . What is required instead is that the capital
transaction serve an operational rather than an investment function." 119 L.Ed.2d at 552 (footnote added). The
same factors which establish a functional relationship between XXXXX and the
XXXXX joint venture support the finding that the XXXXX's interest in the XXXXX
joint venture also served an operational function to XXXXX. XXXXX's interest and involvement in XXXXX
amounted to more than a passive investment.
In
noting "the important distinction between a capital transaction which
serves an investment function and one which serves an operational
function," the U.S. Supreme Court cited the case of Corn Products
Refining Co. v. Commissioner, 350 U.S. 46 (1955), in both the Allied-Signal
decision and in Container Corp. of America v. Franchise Tax Bd., 463
U.S. 159, 77 L.Ed.2d 545 (1983). The Corn
Products case arose in the context of federal taxation and addressed
whether gains on the sale of corn futures would be treated as ordinary income
or capital gains. While literally
fitting the definition of capital gains, the Court looked to the relationship
between the futures and the business of the taxpayer. Since the purchases of the futures constituted an integral part
of the taxpayer's manufacturing business, the Court viewed the gains as
ordinary income. In citing to Corn
Products in both Container and Allied-Signal, the Court
emphasized the need to examine the relationship between the asset generating
the income and the business of the taxpayer.
The
United States Court of Claims applied the Corn Products doctrine in
another federal income tax case with facts similar to those in the instant
case. In Booth Newspapers v. United
States, 303 F.2d 916 (Ct. Cl. 1962), two newspaper publishers had each
acquired fifty percent of a paper mill for the purpose of insuring an adequate
supply of newsprint. Noting the reasons
for the acquisition and its relationship to the newspaper publishing business
of the taxpayers, the court held that the subsequent loss on the sale of stock
in the paper mill would constitute ordinary loss rather than capital loss.
XXXXX's
interest in XXXXX served the business purpose of enhancing the value of the
XXXXX assets prior to disposition, and also provided XXXXX with an assured
source of XXXXX which it could use in its XXXXX and XXXXX manufacturing
operations. Upon formation of the joint
venture, XXXXX had a source of supply which was being produced using the
cost-saving technology contributed by XXXXX.
XXXXX would also share in the profits attributable to all of its
purchases made from XXXXX. The
relationship between XXXXX and XXXXX could also prove to be important in
reducing the risk of breach of contract, in securing product changes which may
have been required by XXXXX, and in having a source of XXXXX XXXXX in the event
of shortages. XXXXX's interest in XXXXX
was much different than that of a mere passive investment. It served an operational function to XXXXX's
regular trade and business operations.
XXXXX
has also suggested that in order for the gain to be apportioned, XXXXX would
need to own more than %%%%% of the stock of XXXXX. The definition of "common ownership" as previously
contained in the statute at Utah Code Ann. §59-7-302(3) (1992)(superseded
January 1, 1994) had application in determining the group of corporations required
to join in a combined return. XXXXX did
not include XXXXX in its combined return and the Auditing Division has not
asserted that XXXXX and XXXXX should be required to file a combined
return. The statutory definition of
common ownership has no application to the issue of whether the gain on the
sale of XXXXX stock constitutes business income or nonbusiness income.
XXXXX's
also asserted that its gain on the sale of XXXXX stock cannot be taxed in Utah
since its interest in the XXXXX joint venture had no operational function to
its XXXXX activities conducted in Utah.
This argument ignores the fact that XXXXX's XXXXX activities constituted
a part of XXXXX's unitary business. XXXXX has three major divisions as a
unitary business within a single legal entity, and XXXXX would have the burden
of proving that those three divisions were not part of a unitary business. XXXXX did not meet that burden of proof.
The
tax returns which XXXXX filed in Utah elected to file as a unitary business
which combined its XXXXX activities with the activities of its other divisions. XXXXX has likewise elected to file returns
which combine the XXXXX activities with the activities of its other divisions
in every other state imposing a filing requirement. Furthermore, XXXXX did not petition for separate accounting for
its XXXXX activities, and it does not go so far as suggesting that separate
returns are appropriate.
XXXXX's
annual reports document synergies existing between its XXXXX activities and its
other divisions in research and development efforts, as set forth in finding of
fact number 59, above.
XXXXX's
general corporate departments also provided other services directly to the
XXXXX division including preparation and issuance of payroll checks, issuance
of payments to vendors, preparation of tax returns incorporating the XXXXX
division's information, preparation of financial reports incorporating the
XXXXX division's information, industrial relations services, and benefit
administration services. See
Answers to Respondent's Second Set of Interrogatories dated XXXXX, 19YY. This evidence suggests a substantial flow of
goods, services, and value between the corporate headquarters departments and
the XXXXX division.
XXXXX
has not introduced evidence that would support a finding that its XXXXX
operations are not part of its unitary business. To the contrary, as to the one general corporate department which
was discussed in any detail, it appears that XXXXX's corporate legal department
provided general corporate services for the XXXXX division, that the lawyers in
the corporate legal department were available to consult with lawyers in the
XXXXX division, and that attorneys in XXXXX's corporate legal department
prosecuted numerous patents for inventions of employees of the XXXXX
division. This evidence again suggests
another flow of value between the corporate headquarters and the XXXXX
division.
The
evidence is that XXXXX, like most other single corporate entities, is
conducting an "integrated business which benefits from an umbrella of
centralized management and controlled interaction." Exxon Corp. v. Wisconsin Dept. of Revenue,
447 U.S. 207, 65 L.Ed.2d 66, 81 (1980).
Treating a single corporation as having more than one trade or business
and attempting to split the corporation for tax purposes would, in essence,
result in separate accounting.
Both
of the conditions required for Utah to apportion income from the XXXXX sale are
satisfied: (1) XXXXX constitutes a unitary business, part of which unitary
business is conducted in Utah; and (2) the income from the XXXXX sale constitutes
business income. Because both of these
conditions are satisfied, the total business income from the unitary business
is properly subject to apportionment.
The
required relationship to support apportionment of the gain from the sale of the
XXXXX joint venture is that the investment in XXXXX served an operational
function to XXXXX's unitary business, a portion of which was conducted in
Utah. As long as the activities being
conducted in Utah constitute a part of XXXXX's unitary business, the total business
income from the unitary business is properly subject to apportionment. The Supreme Court has described the theory
underlying formulary apportionment as follows:
The
unitary business/formula apportionment method is a very different approach to
the problem of taxing businesses operating in more than one jurisdiction. It rejects geographical or transactional
accounting, and instead calculates the local tax base by first defining the
scope of the "unitary business" of which the taxed enterprise's
activities in the taxing jurisdiction form one part, and then apportioning
the total income of that "unitary business" between the taxing
jurisdiction and the rest of the world on the basis of a formula taking into
account objective measures of the corporation's activities within and without
the jurisdiction.
Container, 77 L.Ed.2d at 553 (emphasis added). Even where the unitary business consists of
multiple corporate entities, the Supreme Court has noted that "intangible
'flows of value' within the unitary group will serve to link the various
members together as if they were essentially a single entity" Barclays Bank v. Franchise Tax Bd.,
512 U.S. ___, 129 L.Ed.2d 244, 258 fn. 10 (1994). In this case, all of the divisions of XXXXX are a legal,
practical, and actual single entity.
XXXXX
has asserted that treating its gain as apportionable business income and
applying the three factor formula of UDITPA would result in distortion. As noted by the U.S. Supreme Court,
"[o]ne who attacks a formula of apportionment carries a distinct burden of
showing 'by clear and cogent evidence' that it results in extraterritorial
values being taxed." Butler
Brother v. McColgan, 315 U.S. 501, 86 L.Ed. 991, 996 (1942), citing to Norfolk
& W.R. Co. v. North Carolina, 297 U.S. 682, 688 (1935). XXXXX has not met that burden of proof.
In
claiming distortion, XXXXX suggests that the tax imposed under the audit varies
greatly from that which would be calculated under a separate accounting
approach. Its expert witness, Mr.
XXXXX, described an attempt to separately account for the income earned from
XXXXX's Utah operations only. Mr.
XXXXX's exhibit illustrating his approach was offered as "primarily an
illustration" and was received "almost in the nature of a
hypothetical." Tr. at 525 and
528. On cross-examination, Mr. XXXXX
admitted: (1) that he had not conducted a "full audit" in preparing
his illustration, (2) that in the preparation of his illustration, he had
relied on information provided by XXXXX employees who did not testify as
witnesses at the formal hearing, and (3) that he had resorted to the use of a
formula to apportion certain items of income and expense at least five times in
the preparation of his illustration since certain accounting records were not
available and it was not possible for him to determine exact amounts of certain
items related to XXXXX operations "seven years after the fact." Tr. at 571- 589.
Even
if XXXXX had been able to present a more accurate separate accounting analysis,
the Supreme Court has previously noted the problem in relying on such an
approach to establish distortion. In Container,
supra, the taxpayer challenged California's application of the three
factor formula on the grounds that it failed to recognize that the taxpayer's
foreign subsidiaries were significantly more profitable than the domestic
parent. The Court responded:
The
problem with this argument is obvious: the profit figures relied on by
appellant are based on precisely the sort of formal geographical accounting
whose basic theoretical weaknesses justify resort to formula
apportionment in the first place.
Indeed, we considered a very similar argument in Mobil, pointing
out that whenever a unitary business exists, "separate [geographical]
accounting, while it purports to isolate portions of income received in various
States, may fail to account for contributions to income resulting from
functional integration, centralization of management, and economies of
scale. Because these factors of
profitability arise from the operation of the business as a whole, it becomes misleading
to characterize the income of the business as having a single identifiable
'source.' Although separate geographical accounting may be useful for internal
auditing, for purposes of state taxation it is not constitutionally
required."
103 S.Ct. at 2948-2949, quoting Mobil Oil
Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 438 (1980)
(emphasis added).
XXXXX's
cites the case of Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell,
283 U.S. 123 (1931), in support of its contention that apportioning its gain on
the sale of XXXXX using UDITPA's three factor formula would result in
distortion. In Hans Rees', the
court was evaluating an apportionment fraction based on the single factor of
the ownership of tangible property within the state and found such a formula to
be problematic under the facts of that particular case.
Several
years after Hans Rees, in the case of Butler Brothers v. McColgan,
supra, a taxpayer attempting to rely on the Hans Rees' rationale
argued that California was improperly attempting to convert a loss into a
profit. In that case, California had
applied a three factor formula to all of the income from the taxpayer's unitary
business in determining that the taxpayer should pay tax on $93,500 of
income. By employing separate
geographical accounting, the taxpayer asserted that it incurred a loss
in California of $82,851. The court, in
upholding the assessment, held that "the results of the accounting system
employed by appellant do not impeach the validity or propriety of the formula
which California has applied here."
86 L.Ed. at 996.
Likewise,
in Exxon, supra, the taxpayer's separate state accounting methods
resulted in losses in the amount of $821,320 for 1965, $1,159,830 for 1966,
$1,026,224 for 1967, and $919,575 for 1968.
The Wisconsin Department of Revenue asserted that rather than losses,
the taxpayer should report taxable income of $4,532,155 for the four year
period based on formulary apportionment applied to the total income of the
unitary business.
The court stated:
Exxon contends that Moorman
sanctions the use of separate functional accounting in order to prove the
extraterritorial reach of a state tax statute, and that its accounting in this
case demonstrates that the Wisconsin Supreme Court's application of the state
apportionment statute violates the Due Process Clause.
We
cannot agree. As this Court has on
several occasions recognized, a company's internal accounting techniques are
not binding on a State for tax purposes.
65 L.Ed.2d at 79-80.
The
three factor formula employed by UDITPA has withstood attack under Hans
Rees' distortion analysis. For
example, in Container, supra, the Supreme Court stated:
not only has the
three-factor formula met our approval, but it has become . . . something of a
benchmark against which other apportionment formulas are judged.
. . . .
The
three-factor formula used by California has gained wide approval precisely
because payroll, property, and sales appear in combination to reflect a very
large share of the activities by which value is generated. It is therefore able to avoid the sorts of
distortions that were present in Hans Rees' Sons, Inc.
77 L.Ed.2d at 564-565.
XXXXX,
through the testimony of Mr. XXXXX and his effort to try to separately account
for the income earned in the Utah Operations of XXXXX, has attempted to show
the alleged distortion. However, it is
clear both in fact and as decided in prior U.S. Supreme Court rulings, that
attempts at separate accounting are not successful in demonstrating
distortion. Further, not only is
separate accounting not successful at demonstrating distortion, but it is also
not the solution to any distortion which may exist. The proposals of Mr. XXXXX such as his suggestion to treat the
perceived distortion were based largely on separate accounting concepts. Those
proposals are not lawful because they are not based upon the Utah statutorily
required apportionment formula. Those proposed
solutions also do not accurately calculate any possible distortion, and they
would not achieve a legally permissible solution to any such possible
distortion. If an apportionment
formula, such as the UDITPA three factor formula, results in distortion, the
normal relief would be “factor relief” by modifying one of the three factors,
or by including other factors. Those
alternatives were not proposed by Mr. XXXXX, and there is testimony or evidence
upon which such factor relief could be fashioned.
As
noted above and by the U.S. Supreme Court, “[o]ne who attacks a formula of
apportionment carries a distinct burden of showing ‘by clear and cogent
evidence’ that it results in extraterritorial values being taxed.” Butler
Brother v. McColgan, 315 U.S. 501, 86 L.Ed. 991, 996 (1942), citing to Norfolk
& W.R. Co. v. North Carolina, 297 U.S. 682, 688 (1935). Petitioner has
not presented clear and cogent evidence
that extraterritorial values are being taxed. XXXXX has not met that burden of
proof.
XXXXX
attempts to argue the issue as to the proper treatment of dividends received
from XXXXX in 19YY and 19YY. It argues
that such dividends should be treated as nonbusiness income. Since it treated such dividends as business
income on its returns, it now asserts that it should be entitled to a refund of
taxes paid on such dividends. This
issue was not raised in XXXXX's original Petition for Redetermination or any of
its subsequent amendments. Having not
been raised in an original or amended petition for redetermination, the issue
is not properly before the Commission in connection with this appeal. Moreover, this issue does not arise in
connection with this audit. The
Auditing Division made no adjustments to the treatment XXXXX had given the
XXXXX dividends. XXXXX, in filing its
returns, treated the dividends as business income subject to
apportionment. It has not attempted to
alter this treatment by timely filing amended returns.
XXXXX
is beyond the statute of limitations for seeking any refund of taxes paid in
connection with the XXXXX dividends.
Utah Code Ann. § 59-7-141 (renumbered §59-7-522 as of January 1, 1994)
provides that no credit or refund of a tax overpayment "shall be allowed
or made after three years from the time the tax was paid, unless before the
expiration of such period a claim therefor is filed with the commission by the
taxpayer." Having filed its 19YY
and 19YY returns in 19YY and 19YY respectively, more than seven years has
elapsed from the time the tax relating to the dividends was paid by XXXXX. There is no evidence of a claim having been
made for credit or refund within the three year statute of limitations period.
As
a final note, XXXXX based almost all of its arguments and evidence upon the
assumption that the unitary business was the XXXXX Division, whereas it is
clear that the unitary business includes at least the three major divisions of
XXXXX. It may have been possible for
XXXXX to create separate legal entities for each of its three major divisions,
and to possibly have removed the functional integration, centralization of
management, and economies of scale which were present in the three major
divisions which formed the unitary business.
If XXXXX had taken those actions, then it is very possible that the
results of this proceeding would be different.
However, XXXXX did not take those actions and it should not be taxed as
though it had taken such actions.
DECISION
The
gain realized by XXXXX on the sale of XXXXX stock is properly treated as
apportionable business income, satisfying the functional test of the statutory
definition. As apportionable income,
the gain is properly apportioned on the basis of the UDITPA three-factor
formula as determined by the Auditing Division. XXXXX has failed to carry its distinct burden of showing by clear
and cogent evidence that the application of the statutory formula results in
extraterritorial values being taxed.
The determination of the Auditing Division is affirmed and the petition
for redetermination is denied. It is so
ordered.
DATED
this 19th day of September, 1996.
BY ORDER OF THE UTAH STATE TAX COMMISSION.
W. Val
Oveson Roger
O. Tew
Chairman Commissioner
Joe B.
Pacheco Alice
Shearer
Commissioner Commissioner
NOTICE: You have twenty (20) days after the date of a final order to
file a Request for Reconsideration with the Commission. If you do not file a Request for
Reconsideration with the Commission, have thirty (30) days after the date of a
final order to file a.) a Petition for Judicial Review in the Supreme Court, of
b.) a Petition for Judicial Review by trial de novo in district court. (Utah
Administrative Rule R861-1A-5(P) and Utah Code Ann. §§59-1-601(1),63-46b-13 et.
seq.)
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