BEFORE THE UTAH STATE TAX COMMISSION
____________________________________
XXXXX, ) FINDINGS OF FACT,
: CONCLUSIONS
OF LAW,
Petitioner, : AND FINAL DECISION
:
v. :
:
AUDITING
DIVISION OF UTAH : Appeal Nos. 88-2535 and
STATE TAX COMMISSION, : 90-2572
Respondent. : Tax: Corporate Franchise
____________________________________
STATEMENT OF
CASE
This matter came before the Utah State Tax Commission for a formal hearing held XXXXX through XXXXX, 19YY. G. Blaine Davis, Administrative Law Judge, Chairman W. Val Oveson, Commissioner Joe B. Pacheco, and Commissioner Roger O. Tew heard the matter for and on behalf of the Commission. Present and representing XXXXX ("XXXXX", “XXXXX” or “XXXXX”) were XXXXX of the law firm of XXXXX, and XXXXX of 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.
FINDINGS OF
FACT
XXXXX
1. The tax at issue is XXXXX corporate franchise tax for the years 19YY through 19YY.
2. XXXXX was organized and incorporated in the State of Utah in 19YY as the result of the consolidation of the XXXXX, a Utah corporation, and the XXXXX, a Utah corporation.
3. From its inception, XXXXX has been engaged in the business of producing and selling XXXXX and by-products produced from XXXXX. These operations will be referred to as XXXXX “sugar operations.”
4. During the audit periods, XXXXX owned and operated four processing factories located in XXXXX, XXXXX, and XXXXX, XXXXX and XXXXX, XXXXX and maintained its general offices in XXXXX, Utah.
5. During the audit period, XXXXX had approximately 1,000 full time employees and 1,500 seasonal employees devoting their efforts to the XXXXX operations.
6. Throughout the audit period, XXXXX's XXXXX operations were directed and managed from XXXXX, Utah.
7. From its inception, XXXXX’s principal executive offices have been located in XXXXX, Utah.
8. Documents filed by XXXXX with the Securities and Exchange Commission during the audit period and reports made to its shareholders during the audit period identified XXXXX, Utah as the location of XXXXX’s principal executive offices. For example: (a) in the XXXXX, 19YY Form S-1 filed with the Securities and Exchange Commission, XXXXX asserted that “[t]he Company is a Utah corporation with principal executive offices located at . . . XXXXX, Utah;” (b) XXXXX identified XXXXX, Utah as the location of its principal executive offices in its Form 10-K filed with the Securities and Exchange Commission for the year ended XXXXX, 19YY (a copy of which was included in its XXXXX, 19YY Report to Shareholders); (c) in the XXXXX, 19YY Form S-1 filed with the Securities and Exchange Commission, XXXXX asserted that “[t]he Company is a Utah corporation with principal executive offices located at . . . XXXXX, Utah;” and (d) XXXXX identified XXXXX, Utah as the location of its principal executive offices in its Form 10-K filed with the Securities and Exchange Commission for the year ended XXXXX, 19YY (a copy of which was included in its XXXXX, 19YY Annual Report to Shareholders).
9. During the audit period, Mr. XXXXX, XXXXX’s President and Chief Operating Officer, always represented that XXXXX, Utah was the headquarters of XXXXX.
10. Mr. XXXXX devoted his full time employment efforts to XXXXX as its President and Chief Operating Officer during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
11. During the audit period, Mr. XXXXX was XXXXX’s Senior Vice President. As such, Mr. XXXXX was in charge of marketing all of XXXXX’s XXXXX and by-products and supervised XXXXX’s entire sales department and its traffic department. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Senior Vice President during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
12. During the audit period, Mr. XXXXX was XXXXX’s Executive Vice President. As such, Mr. XXXXX handled many of the agricultural matters for XXXXX and supervised all of the XXXXX operation employees in XXXXX, Utah and in XXXXX and XXXXX. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Executive Vice President during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
13. During the audit period, Mr. XXXXX was XXXXX’s Vice President of Operations. As such, Mr. XXXXX was in charge of the operations of XXXXX’s four factories as well as its facilities in XXXXX and XXXXX. Mr. XXXXX supervised all of XXXXX’s factory managers and the master mechanics, and indirectly supervised all the assistants, assistant superintendents, mechanics, and everybody at the factories. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Vice President of Operations during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
14. During the audit period, XXXXX was XXXXX’s Vice President of Research. As such, Mr. XXXXX was in charge of laboratory operations in each of XXXXX’s four factories and supervised all research personnel as well as laboratory personnel. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Vice President of Research during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
15. During the audit period, XXXXX was an officer of XXXXX with the title of Treasurer. As such, Mr. XXXXX interfaced with all of the accounting functions, the storerooms and treasury functions. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Treasurer during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s Ogden, Utah offices.
16. During the audit period, XXXXX was an officer of XXXXX with the title of Secretary and General Counsel. As such, Mr. XXXXX was in charge of the legal affairs of the XXXXX operations. Mr. XXXXX also provided services in the pension area, and negotiated union contracts for XXXXX. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Secretary and General Counsel during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
17. During the audit period, XXXXX was an officer of XXXXX with the title of Controller. As such, Mr. XXXXX was in charge of the financial reporting for the XXXXX operations and supervised accounting office personnel. Mr. XXXXX reported to Mr. XXXXX in connection with his responsibilities. Mr. XXXXX devoted his full time employment efforts to XXXXX as its Controller during the audit period. Mr. XXXXX was a resident of Utah and, as an officer of XXXXX, was based at XXXXX’s XXXXX, Utah offices.
18. Under the direction of XXXXX, XXXXX’s controller, the following functions and duties, among others, were performed in XXXXX, Utah during the audit periods:
a. state income tax functions,
b. preparation of internal monthly financial reports,
c. initial preparation of annual financial statements,
d. credit management in relation to XXXXX's customers,
e. invoice preparation, and
f. various other accounting functions related to XXXXX's day-to-day operations.
19. XXXXX maintained all employment records at its XXXXX, Utah general offices and at the factory sites in XXXXX and XXXXX.
20. On its Utah Corporation Franchise Tax Returns for each of the audit years, XXXXX indicated that its corporate books and records were maintained in XXXXX, Utah.
21. Minutes of the meetings of XXXXX's board of directors from 19YY through 19YY were maintained at XXXXX's XXXXX, Utah general offices.
XXXXX
22. XXXXX is an entrepreneur, based in XXXXX, XXXXX, with a long history of acquiring various well-run, low technology businesses.
23. Mr. XXXXX, through XXXXX (“XXXXX”), a diversified holding company which he controls, was constantly and actively engaged in evaluating investment and acquisition opportunities in other companies, acquiring securities in such companies through XXXXX or related entities, monitoring the performance of those securities, and making decisions to hold, sell or increase the holdings in such securities.
24. He typically restructures the finances of the companies he acquires, using the capital to strengthen his financial base, provide additional leverage, and finance additional acquisitions.
25. In XXXXX 19YY, most of the common stock of XXXXX was acquired by XXXXX ("XXXXX"), corporate affiliates of XXXXX, and six employee benefit plans maintained by corporate affiliates of XXXXX. XXXXX was a majority owned subsidiary of XXXXX ("XXXXX"), a diversified holding company.
26. XXXXX was very conservative from a cash management viewpoint. Mr. XXXXX believed its underemployed financial assets would produce a greater return if it diversified its business activities.
27. At the time of the 19YY acquisition, XXXXX had cash assets of approximately $$$$$. This cash was used by XXXXX in the fall of 19YY to repurchase ##### shares of its common stock that were not held by XXXXX or other affiliates of XXXXX.
28. Following the 19YY acquisition and XXXXX’s repurchase of common stock, XXXXX, corporate affiliates of XXXXX, and six employee benefit plans maintained by corporate affiliates of XXXXX, collectively held approximately %%%%% of XXXXX’s outstanding common stock. Since that time, the majority of XXXXX’s stock has been held by these or other affiliates of XXXXX.
29. All of XXXXX’s common stock is held by a trust established by XXXXX of which Mr. XXXXX is the sole trustee.
30. Mr. XXXXX concluded that XXXXX's XXXXX operation was well run, therefore, the corporation’s officers and management were retained following the 19YY acquisition.
31. Prior to the acquisition, XXXXX was run by its Chairman, XXXXX, and a very active board of directors located in Utah.
32. Shortly after XXXXX’s acquisition of XXXXX, the entire board of directors resigned.
33. Mr. XXXXX was usually appointed as the Chairman of the Board and Chief Executive Officer of any companies which were acquired through XXXXX and/or related entities. In XXXXX of 19YY, Mr. XXXXX was elected Chairman of the Board and named Chief Executive Officer of XXXXX. Mr. XXXXX remained Chief Executive Officer of XXXXX through XXXXX, 19YY.
34. Mr. XXXXX devoted only part of his time to his duties as an officer of XXXXX and received no compensation directly from XXXXX. In addition to his position with XXXXX, Mr. XXXXX was also the President of XXXXX from XXXXX 19YY to XXXXX 19YY, the Chief Executive Officer of XXXXX from XXXXX 19YY to the present, the Chairman of the Board of XXXXX from XXXXX 19YY to the present, and a director of XXXXX from XXXXX 19YY to the present. He was also executive officer and/or director of various companies related to XXXXX during the audit period.
35. In his role with XXXXX, Mr. XXXXX did not get involved in the details of the XXXXX operations.
36. Mr. XXXXX also had sufficient influence and control to name all of the other directors.
37. In 19YY and 19YY, four out of six members of the XXXXX board of directors were from XXXXX. In 19YY, two additional directors, one from XXXXX and one from XXXXX were added. During this period there were never more than two Utah directors.
38. In addition to Mr. XXXXX and the eight full time officers of XXXXX who were based in the XXXXX, Utah offices, XXXXX and XXXXX, both residents of XXXXX, served as officers of XXXXX during a portion of the audit period. Mr. XXXXX and Mr. XXXXX devoted only part of their time to their duties as officers of XXXXX and received no compensation directly from XXXXX. In addition to their positions with XXXXX, Mr. XXXXX and Mr. XXXXX were officers of various other companies related to XXXXX.
39. Mr. XXXXX was Chief Financial Officer of XXXXX. He supervised the treasury function of XXXXX, which included the negotiation and implementation of working capital bank credit facilities to finance the XXXXX operations working capital needs, improving the cash flow of XXXXX, monitoring all accounting, tax and legal services performed, and other duties for XXXXX.
40. Mr. XXXXX performed these duties in XXXXX.
41. Mr. XXXXX took over Mr. XXXXX’s position as Chief Financial officer in XXXXX 19YY.
42. Mr. XXXXX’s responsibilities in that role were similar to Mr. XXXXX’s role described above.
43. Prior to becoming the Chief Financial Officer of XXXXX, Mr. XXXXX was its Chief Accounting Officer. As such he was ultimately responsible for maintaining the books and records of XXXXX and complying with all accounting and financial reporting requirements imposed by the SEC and other governmental entities.
44. Mr. XXXXX performed his duties in XXXXX.
45. Operating funds for the XXXXX operations were generated internally from operations, through bank loans, through loans obtained from the federal government and, occasionally, from interdivisional loans from the F.E.D. Division.
46. Effective XXXXX, 19YY, XXXXX entered into a Management Services Agreement with XXXXX whereby XXXXX would provide services listed in the agreement for an annual fee of $$$$$.
47. Effective XXXXX, 19YY, XXXXX amended the Management Services Agreement with XXXXX to provide that XXXXX would provide the services listed in the agreement for an annual fee of $$$$$.
48. These management services consisted of the services of Mr. XXXXX, Mr. XXXXX and Mr. XXXXX, as well as various support services provided by XXXXX staff. Mr. XXXXX, Mr. XXXXX and Mr. XXXXX performed these services in XXXXX.
49. XXXXX, the largest XXXXX subsidiary, consumed a majority of Mr. XXXXX's time during the years in issue.
50. Mr. XXXXX spent from %%%%%-%%%%% of his time on matters related to XXXXX’s sugar operations and as much as %%%%% in the Finance, Expansion and Diversification (F.E.D.) Division.
51. Mr. XXXXX made the decision to retain XXXXX as President and Chief Operating Officer of XXXXX.
52. Mr. XXXXX reported to Mr. XXXXX, in XXXXX, who made final decisions on budgets, major capital expenditures, long-term planning, labor relations and other significant matters.
53. Prior to the 19YY acquisition, XXXXX had a philosophy of accumulating sufficient cash reserves to meet all of its working capital needs for fall XXXXX purchases and for the operation of its factories without seeking outside financing. As a result, XXXXX accumulated large sums of cash annually to meet its operating needs. XXXXX employed a cash manager to invest these funds to get the best rate of return for XXXXX and to assure that investments would mature when payments to the XXXXX growers were due. Most of the money was invested primarily in bank certificates of deposit.
54. After the 19YY acquisition,XXXXX’s philosophy of accumulating cash resources changed. XXXXX sought outside funding through lines of credit, government sponsored commodity loans, and issuances of debt. Some of these funds were used in the XXXXX operations and some were invested in stock of other companies.
55.XXXXX’s purchases and sales of stock during the audit period were as shown in Exhibit 9.
56. During the audit period, Mr. XXXXX would instruct XXXXX or a related entity such as XXXXX to purchase stock of particular companies. The decision as to which entity or entities would purchase stock of a particular company was based on the availability of funds of the XXXXX-related entities. XXXXX’s stock purchase activities included purchases from other XXXXX-related entities and purchases of stock of companies whose stock was also being purchased by other XXXXX-related entities.
57. With the exception of the XXXXX stock, none of the stock purchased by XXXXX during the audit period was functionally related to XXXXX’s operation.
58. All of the meetings of XXXXX’s board of directors from 19YY through 19YY were held in XXXXX, XXXXX or were held by telephone between XXXXX and Utah.
59. In his role as Chief Executive Officer, Mr. XXXXX was actively involved in making management decisions about all aspects of XXXXX’s operations. These decisions were made in XXXXX.
60. Mr. XXXXX had final responsibility and authority for all aspects of the business of XXXXX.
61. An annual business plan was submitted to Mr. XXXXX and approved by the Board.
62. Mr. XXXXX's responsibilities for XXXXX included reviewing and approving current year and long-range operating plans, reviewing and approving major capital expenditures and plant expansion, reviewing and approving marketing strategies and new process developments, reviewing and approving major changes to employee benefit plans, reviewing and approving the Company’s labor negotiating strategy, and reviewing and recommending bonus payments to employees of the XXXXX business.
Finance,
Expansion and Diversification (F.E.D.) Division
63. The F.E.D. Division activities at XXXXX began almost immediately after its acquisition by XXXXX.
64. Prior to its acquisition by Mr. XXXXX, XXXXX had made no significant attempts to diversify.
65. Mr. XXXXX, as Chairman and CEO, had final responsibility and authority for all activities of the F.E.D. Division. He identified prospective investments, evaluated those prospects and made final decisions to purchase investments. He also monitored the continuing prospects of existing investments and decided when and if such investments should be sold.
66. Mr. XXXXX also had extensive duties with regard to the F.E.D. Division. He spent time negotiating and implementing long term debt facilities used to finance the F.E.D. Division. He also spent time investigating acquisition targets identified by Mr. XXXXX.
67. A majority of Mr. XXXXX’s time during the years in issue was spent on XXXXX matters, including its subsidiary, XXXXX, and acquisition activities.
68. Mr. XXXXX succeeded Mr. XXXXX in these duties.
69. A majority of Mr. XXXXX’s time during the years in issue was spent on XXXXX matters and acquisition activity.
70. The identification, investigation and evaluation of prospective investments or acquisitions for the F.E.D. Division was performed solely by officers of XXXXX in XXXXX.
71. XXXXX officers in XXXXX used investment bankers and outside legal counsel in the transactions whose fees were expensive.
72. Officers and employees of XXXXX based in Utah had no involvement with the identification, investigation or evaluation of prospective investments or acquisitions either before or after the creation of the F.E.D. Division except to the extent that officers based in Utah were also members of the board of directors and participated in meetings of the board to discuss such investments or acquisitions.
73. Orders to purchase or sell F.E.D. securities were placed from XXXXX with investment brokers around the country.
74. Prior to the creation of the F.E.D. Division, officers of XXXXX who resided in XXXXX would inform Utah personnel of the acquisitions being made and Utah personnel would cut checks or wire funds to pay for the acquisitions and make the appropriate accounting entries on the books and records of XXXXX to reflect the purchase or sale of securities, or the receipt of interest and dividends.
75. Officers of XXXXX in XXXXX or employees of XXXXX located in XXXXX would make or have made all the appropriate accounting entries to reflect the purchase or sale of securities or the receipt of interest and dividends on the F.E.D. Division’s books.
76. The decision to create the F.E.D. Division was made in XXXXX.
77. From time to time, after the creation of the F.E.D. division, officers of XXXXX in XXXXX would inquire as to cash balances in the XXXXX Division’s accounts in Utah and direct Utah personnel to make interdivisional loans to the F.E.D. Division either by transferring funds directly to the F.E.D. Division accounts, or by paying for securities purchased by the F.E.D. Division.
78. F.E.D. Division funds were generated internally from operations, through margin loans, through XXXXX’s issuance of subordinated notes, and, occasionally, from interdivisional loans from the XXXXX Division.
79. In XXXXX 19YY, XXXXX purchased almost $$$$$ million of XXXXX. This decision, and Mr. XXXXX's discussions with Mr. XXXXX, and later the president of the company, Mr. XXXXX, took place in XXXXX.
80. Neither Mr. XXXXX nor any Utah officers had any material involvement with the decision to purchase XXXXX.
81. In XXXXX 19YY, XXXXX sold a subsidiary that had been engaged in the production of XXXXX and used the sales proceeds to acquire almost $$$$$ of outstanding common stock of XXXXX (“XXXXX”), a manufacturer of specialty chemicals and building materials. This decision, and the subsequent monitoring by Mr. XXXXX of XXXXX, were performed in XXXXX.
82. The decision to sell the XXXXX subsidiary was initiated and made by Mr. XXXXX in XXXXX.
83. The decision to purchase the XXXXX stock was made entirely by Mr. XXXXX, with no involvement by Utah personnel.
84. The gains ultimately received on the XXXXX stock of $$$$$ accounts for much of the income that is in question in the proceeding.
85. In the fall of 19YY, XXXXX borrowed up to $$$$$ under a $$$$$ revolving credit facility with a group of banks to finance payments to XXXXX growers. XXXXX repaid these borrowings in XXXXX 19YY.
86. The decision to expand the credit facility was made by Mr. XXXXX in XXXXX.
87. The choice of the lead bank was made by Mr. XXXXX and Mr. XXXXX in XXXXX.
88. The negotiations with the banks on the credit facility were conducted by Mr. XXXXX, Mr. XXXXX and others in XXXXX.
89. Utah personnel were only involved in the negotiations of the revolving credit agreement to the extent Mr. XXXXX felt it was helpful to give the bankers some general background on the XXXXX operations.
90. In XXXXX 19YY, XXXXX issued $$$$$ in senior subordinated notes. The proceeds of the debt offering, as disclosed in the prospectus, were to be used “by the Company in its diversification and expansion efforts...” and “for research and development and for general corporate purposes.”
91. The financial strength and cash flow of the XXXXX operations was necessary to support this debt offering.
92. Mr. XXXXX'S desire to engage in investment and acquisition activities was publicly disclosed in XXXXX’s Form 10- K for the year-ended XXXXX, 19YY:
The Company intends to diversify and expand
its business primarily through the purchase of controlling interests in
companies engaged in other businesses, which businesses may be unrelated to
XXXXX production. The Company may also
expand its XXXXX production operations through the purchase of additional XXXXX
production facilities or the expansion of the Company’s existing
facilities. The Company intends to
review and evaluate various opportunities for expansion of its existing
operations as well as diversification into other industries; however,
management believes that expansion opportunities in the XXXXX industry will be
limited as a result of the intense competition in the domestic XXXXX industry
and the small number of companies engaged in XXXXX production. (XXXXX’s Form
10-K for year-ended XXXXX, 19YY, p.6.)
93. The decision to issue the notes was made by Mr. XXXXX in XXXXX.
94. The issuance of the notes was handled primarily by Mr. XXXXX and Mr. XXXXX in XXXXX. They negotiated terms with the investment bankers and worked with the attorneys in compiling prospectuses and registration statements.
95. Utah personnel were only involved in the issue of the notes to the extent necessary to give the investment bankers some general background on the XXXXX operations.
96. In 19YY, XXXXX purchased over $$$$$ XXXXX stock, with the thought of eventually gaining control. Mr. XXXXX had studied the company for some time and had met with its founder. Dr. XXXXX. The acquisition did not work out and the stock was sold at a reasonable profit. Decisions to buy and sell took place in XXXXX.
97. In XXXXX 19YY, XXXXX acquired a small interest in XXXXX. It was a company involved in the XXXXX business that Mr. XXXXX and Mr. XXXXX had previously discussed as a possible merger target. The price of XXXXX increased rapidly after the acquisition, however, the stock was sold at a profit. This is the only acquisition in which there was any input at all from Mr. XXXXX, because it was the only target that was actively engaged in the XXXXX business. Like all other F.E.D. Business acquisitions, however, the decisions regarding XXXXX were made in XXXXX.
98. On XXXXX, 19YY, XXXXX entered into an acquisition agreement with XXXXX (“XXXXX”), an integrated forest products concern based in XXXXX, XXXXX, whereby XXXXX purchased %%%%% of XXXXX’s stock for $$$$$.
99. This agreement was the result of several weeks of intensive effort by Mr. XXXXX and others in XXXXX, including an effort to take over XXXXX, an investment company that held a large block of XXXXX stock. XXXXX ultimately agreed to sell its XXXXX stock only when Mr. XXXXX offered to abandon his attempts to take over XXXXX.
100. The extensive work necessary to analyze XXXXX, mastermind its acquisition and subsequently manage it, was handled primarily out of XXXXX.
101. The decision to purchase XXXXX was made by Mr. XXXXX in XXXXX.
102. Neither Mr. XXXXX nor any Utah officers or employees had any involvement in the decision to purchase XXXXX.
103. After its acquisition, XXXXX was closely monitored by XXXXX officers in XXXXX and, was later managed by Mr. XXXXX.
104. Mr. XXXXX later became president of XXXXX, when Mr. XXXXX became dissatisfied with XXXXX’s implementation of his directions.
105. Utah personnel had no role in monitoring or managing XXXXX.
106. Late in 19YY and early 19YY, XXXXX acquired over $$$$$ of XXXXX (XXXXX) stock. The acquisition was made with the goal of acquiring enough control to replace management and to position XXXXX for a merger with another XXXXX. Mr. XXXXX assumed a position on the Board of Directors, put Mr. XXXXX back in as Chairman and effectuated a merger with XXXXX. Like the other acquisitions, this one was handled out of XXXXX.
107. In XXXXX, XXXXX acquired a small interest in XXXXX, a small company that owned several XXXXX plants. Mr. XXXXX believed it was undervalued but eventually decided that there were more promising alternatives for XXXXX to pursue, so the interest was sold. These decisions were made in XXXXX.
108. In XXXXX 19YY, XXXXX issued approximately $$$$$ in additional debt. The purpose of the offering, as disclosed by the prospectus, was “to acquire interests in other companies...” and “for general corporate purposes.” This debt offering was arranged in XXXXX and secured primarily by XXXXX warrants.
109. The projected profitability of the XXXXX operations was not the primary motivation presented to investors to obtain the $$$$$ financing.
110. The decision to issue the debentures was made by Mr. XXXXX in XXXXX.
111. The issue of the debentures was handled primarily by Mr. XXXXX and Mr. XXXXX in XXXXX with assistance from XXXXX personnel in XXXXX. They negotiated rates with the investment bankers and worked with the attorneys in compiling and preparing prospectuses and registration statements.
112. Utah personnel had no responsibility with regard to the $$$$$ debt offering.
113. Approximately $$$$$ of the offering proceeds was used almost immediately to acquire an interest in XXXXX, a XXXXX concern.
114. By the end of 19YY, XXXXX had increased its investment in XXXXX to about $$$$$.
115. The XXXXX transaction required extensive tax and legal analysis and Mr. XXXXX made extensive efforts to get Congressional and union support for the acquisition.
116. XXXXX was eventually out bid by XXXXX, but ended up making $$$$$ on the attempt.
117. The decision to purchase XXXXX was made solely by Mr. XXXXX in XXXXX.
118. Utah personnel had no involvement in the decision to purchase XXXXX.
119. The gain on the XXXXX stock of $$$$$ accounts for much of the income, other than the XXXXX gain, that is in issue in this proceeding.
120. In mid-19YY, XXXXX purchased $$$$$ in XXXXX stock, a XXXXX based conglomerate listed on the New York Stock Exchange. Mr. XXXXX decided not to continue the attempt to gain control because other alternatives, notably XXXXX, became available.
121. In 19YY, XXXXX purchased over $$$$$ of XXXXX stock. This stock was purchased primarily because of XXXXX’s banking relationship with XXXXX, and the prior relationship between the bank’s chairman and Mr. XXXXX. When the stock went up in value, it was sold.
122. In 19YY, XXXXX purchased $$$$$ in XXXXX stock and $$$$$ of XXXXX stock (a XXXXX merger partner), in an attempt to acquire control. Whenever additional stock was acquired, however, the price went up, making acquisition of a control block unduly expensive. Accordingly, Mr. XXXXX decided to sell the interest.
123. In 19YY, XXXXX purchased an interest in XXXXX. XXXXX was a XXXXX specializing in XXXXX. Mr. XXXXX thought the company was a good value but, because of management opposition and difficulties arising from the corporation’s incorporation in XXXXX, he decided not to pursue it.
124. In 19YY, XXXXX purchased an interest in XXXXX. XXXXX was a company specializing in XXXXX. Mr. XXXXX became interested in the company because of his own experience as a XXXXX. XXXXX bought a stake in the company but abandoned any effort to acquire control when the price went up.
125. In 19YY, XXXXX acquired an interest in XXXXX, a XXXXX, because Mr. XXXXX believed a XXXXX might be a valuable addition to XXXXX’s F.E.D. Division. After further investigation into the amount of government regulation involved, XXXXX abandoned its takeover efforts.
126. Also in 19YY, XXXXX undertook its most aggressive effort, purchasing almost $$$$$ in XXXXX stock. Eventually, XXXXX and related entities purchased almost $$$$$ of stock and they now control the company.
127. The XXXXX acquisition, like XXXXX, XXXXX, XXXXX, XXXXX, XXXXX, XXXXX and XXXXX, was planned, evaluated and executed by Mr. XXXXX, with the assistance of Mr. XXXXX and Mr. XXXXX, in XXXXX.
128. In addition to the investments and acquisitions discussed above, other acquisitions were made in XXXXX during the relevant time period.
129. These acquisitions implemented Mr. XXXXX's original decision to expand the business of XXXXX to include the acquisition of equity interests in various corporate entities.
130. Effective XXXXX, 19YY, XXXXX made book entries to purportedly separate the corporation into two divisions. After this date, XXXXX referred to its XXXXX operations as the XXXXX Division and to its purchases and sales of stock as the Finance, Expansion, and Diversification ("F.E.D.") Division.
131. The divisional separation of XXXXX’s activities was undertaken to recognize and formalize the existing separation of the XXXXX operations from the investment and acquisition activities. This separation allowed certain Utah management personnel responsible only for the XXXXX business to be isolated and insulated, from an accounting standpoint, from the effects of investment and acquisition decisions of the F.E.D. division over which it had no control.
132. The decision to create the F.E.D. Division was made by XXXXX personnel.
133. The F.E.D. Division had no employees and no real or tangible personal property other than miscellaneous books and records.
The State of XXXXX
134. XXXXX did not have any employees in the State of XXXXX during the audit periods.
135. XXXXX never incurred payroll expenses for any individual in the State of XXXXX.
136. XXXXX did not own, lease, or rent any real or tangible personal property in the State of XXXXX during the audit periods except for miscellaneous books and records.
137. XXXXX never applied for or received a certificate of authority to transact business within the State of XXXXX.
138. XXXXX did not timely file any tax returns with the State of XXXXX for the audit periods. On or about XXXXX, 19YY, XXXXX filed XXXXX Corporation Franchise Tax Reports with the State of XXXXX for years 19YY through 19YY pursuant to a Voluntary Disclosure Agreement. XXXXX remitted a total of $$$$$ in taxes in connection with this filing. On both the XXXXX, 19YY Voluntary Disclosure Agreement with the State of XXXXX and in the XXXXX Corporation Franchise Tax Reports filed in accordance with such agreement, XXXXX listed its address as XXXXX, XXXXX, Utah.
19YY Reorganization Creating the New XXXXX
139. On XXXXX, 19YY, XXXXX was merged into LLC Corporation, another corporation related to XXXXX. The XXXXX Division's assets and related liabilities were immediately dropped down into a new subsidiary. The surviving corporation, renamed XXXXX ("XXXXX"), retained all the F.E.D. Division's assets and related liabilities.
140. The new subsidiary was named the XXXXX (“XXXXX"). XXXXX has no relevance to the issues in dispute in this case.
Tax
Returns and Audits
141. Prior to 19YY, XXXXX filed its own federal corporate income tax return. Those returns were prepared primarily in Utah and were reviewed and approved by XXXXX personnel in XXXXX pursuant to the management agreement.
142. After 19YY, XXXXX’s federal tax information was included in a consolidated return with XXXXX and related entities. Utah based personnel would prepare a “tax packet” that would be forwarded to XXXXX to be incorporated in the consolidated return prepared in XXXXX by XXXXX personnel.
143. XXXXX filed Utah Corporation Franchise Tax Returns, Form TC-20, with the Utah State Tax Commission for 19YY through 19YY, which treated dividends and the gains or losses from the sale of stock as apportionable business income/loss.
144. XXXXX filed Utah Corporation Franchise Tax Returns, Form TC-20, with the Utah State Tax Commission for 19YY and 19YY which reported only the income of the XXXXX Division of XXXXX. The returns included pro forma U.S. Corporation Income Tax Returns, Form 1120, which excluded the income of the F.E.D. Division.
145. On XXXXX, 19YY, the Auditing Division issued a Statutory Notice of Deficiency for 19YY through 19YY asserting a tax and interest deficiency against XXXXX.
146. On XXXXX, 19YY, the Auditing Division issued a Statutory Notice for 19YY and 19YY asserting a tax and interest deficiency against XXXXX for 19YY and the short period XXXXX, 19YY through XXXXX, 19YY, and a tax and interest deficiency against XXXXX for the short period XXXXX, 19YY through XXXXX, 19YY. A portion of the deficiency arises from the Auditing Division’s inclusion of the income from the F.E.D. Division and the treatment of such income as nonbusiness income which the Auditing Division asserts should be allocated to Utah as XXXXX’s commercial domicile.
147. The 19YY and 19YY audit was amended, and a Second Statutory Notice of Deficiency dated XXXXX, 19YY was issued, to reflect federal audit adjustments.
148. All Statutory Notices of Deficiency were timely protested by XXXXX timely filing Petitions for Redetermination.
149. The Auditing Division and XXXXX engaged in extensive discussions regarding various computational issues and as a result entered into a Stipulation for Partial Settlement which was approved by the Tax Commission on XXXXX, 19YY, whereby the amount of tax currently claimed to be due by the Auditing Division for the years in issue, is as follows:
Tax Deficiency (Overpayment)
Alleged by
Period ended Auditing Division
XXXXX 19YY ($$$$$)
XXXXX 19YY ($$$$$)
XXXXX 19YY ($$$$$)
XXXXX 19YY $$$$$
XXXXX 19YY $$$$$
XXXXX 19YY $$$$$
$$$$$
150. The Auditing Division issued a Third Statutory Notice of Deficiency dated XXXXX, 19YY to reflect the terms of the Stipulation for Partial Settlement.
151. On XXXXX, 19YY, Petitioner filed a timely protest to the Third Statutory Notice.
152. XXXXX has abandoned its claim regarding unamortized original issue discount (“OID”) as described in more detail in paragraph 6 of the Stipulation for Partial Settlement.
153. Based upon statements made during Mr. XXXXX’s closing argument during the formal hearing, XXXXX has apparently conceded the audit adjustments for calendar years 19YY, 19YY, 19YY, and for XXXXX’s short period XXXXX through XXXXX, 19YY.
154. An Amended Petition was filed by XXXXX on XXXXX, 19YY.
155. This Commission struck the portion of the Amended Petition concerning the computation of Utah income on a “XXXXX Consolidated Return” basis.
156. XXXXX made a proffer of evidence of the Utah income tax liability for 19YY and 19YY, computed on a “XXXXX Consolidated Return” basis. Mr. XXXXX, the Tax Manager for XXXXX, submitted proforma Utah tax returns in support of that contention.
157. The proffer was received for purposes of the record on appeal. The evidence itself was excluded pursuant to this Commission’s amended order to strike, dated XXXXX, 19YY.
158. During the audit periods, XXXXX’s Utah apportionment fraction, based upon the UDITPA formula contained in Utah Code Ann. §59-7-311, fluctuated between approximately %%%%% and %%%%%. By comparison, XXXXX’s XXXXX apportionment fraction during the same period exceeded %%%%%.
159. XXXXX has not paid income or franchise tax to XXXXX or any other state on any of the income from the dividends or gains on the sale of stock underlying this appeal.
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 (1990), which provides, in relevant part:
(1) When the income of a taxpayer subject to
the tax imposed under this part is derived from or attributable to sources both
within and without the state the tax shall be measured by the net income
derived from or attributable to sources within this state in accordance with
this chapter.
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 part of that act, and provides for the allocation 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 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 (1990) as:
(7) “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 (in 1990, RuleR865-6F-8), Utah Code of Administrative Procedure, which provides in relevant part, as follows:
A.
Business and Nonbusiness Income Defined. Utah Code Ann. §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.
2. The classification of income by the labels
occasionally used, such as manufacturing income, compensation for services,
sales income, interest, dividends, rents, royalties, gains, operating income,
nonoperating income, etc., is of no aid in determining whether income is
business or nonbusiness. Income of any type or class and from any source is
business income if it arises from the 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. §509-7-308 (1990), which provides:
(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 (in 1990R865-6F-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(B) (in 1990,R865-6F-8), in 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.
“Nonbusiness income” is defined as “all income other than business income.” Utah Code Ann. §59-7-302(4)(Supp. 1995).
Utah
Code Ann. §59-7-309 (Supp. 1995) provides:
To
the extent they constitute nonbusiness income, interest and dividends are
allocable to this state if the taxpayer’s commercial domicile is in this state.
“Commercial domicile” is defined as “the principal place from which the trade or business of the taxpayer is managed or directed.” Utah Code Ann. §59-7-302(2)(Supp. 1995).
ANALYSIS AND
CONCLUSIONS OF LAW
The issue in this case is how XXXXX’s income from investments in the stocks and securities in other companies should be taxed under the provisions of the Uniform Division of Income for Tax Purposes Act (“UDITPA”).
Petitioner and Respondent have approached this case very differently. The position of Petitioner is that once XXXXX was acquired by XXXXX, it became primarily an investment business consisting of all of the securities purchased in its Finance, Expansion and Diversification (F.E.D.) Division, and that all of its activities were managed and directed from XXXXX, XXXXX. On the other hand, the position of Respondent is that XXXXX has been in the XXXXX business for a period of more than XXXXX (##) years, that it has always been a XXXXX business, and that it remained a XXXXX business even after its acquisition because it continued its XXXXX operations which constituted the core business of the company. The position of Respondent is further that the investments did not constitute a separate business or the sole business, and because all of the documentation and official records of Petitioner showed XXXXX, Utah as the location for the company and the domicile of the company, and because the XXXXX business was managed and directed from XXXXX, Utah, then Respondent argues that XXXXX, Utah was the commercial domicile of XXXXX. Therefore, Petitioner argues, since the Company is in the XXXXX business its nonbusiness investment income is all taxable in the state of Utah, the commercial domicile of XXXXX.
In addition to the general differences between the position of Petitioner and Respondent, there are numerous specific differences. The position of Petitioner is that the F.E.D. Division was either a separate business or the primary business for XXXXX, all of which was managed and directed from XXXXX, that the income from the F.E.D. Division was business income and therefore its business income from the F.E.D. Division should all be allocated to XXXXX. Petitioner’s alternative argument is that the investment income was clearly business income because that was the primary business in which they deemed XXXXX to be engaged, and therefore since it would not all be allocated to the state of XXXXX, it should be apportioned among all of the states pursuant to the UDITPA three factor formula. Petitioner further takes the position that if it is not a separate business or the major business, and the F.E.D. income is therefore not business income, then the commercial domicile of the total business is still XXXXX, XXXXX, all of the income should then be allocated to XXXXX. It argues that it doesn’t matter that the documents all indicate XXXXX, Utah as the location of the business, or that there were no employees or property of XXXXX located within the state of XXXXX. In the view of XXXXX, the management and direction of the Company were taking place in XXXXX which should be deemed the commercial domicile of the company. The last point of Petitioner is that if it is determined that this was non-business income and that Utah is the state of domicile, the Commission should find, pursuant to Utah Code Ann. §59-7-320, that an unfair amount has been allocated to the state of Utah and that a different method of allocation should be made by the Commission. It therefore argues that the attribution of the F.E.D. Division income to the state of XXXXX is required to avoid an unconstitutional distortion.
The position of Respondent is much easier to follow, because it does not have several alternative arguments as does Petitioner. Respondent’s position is that the trade or business of XXXXX is the production and sale of XXXXX and by-products from XXXXX, that XXXXX’s investment income is therefore non-business income since its investments were not related to the XXXXX business, and that the income should therefore be allocated to the state of Utah as its commercial domicile since its trade or business, i.e., its XXXXX operations are managed and directed from its offices in XXXXX, Utah.
Respondent further argues that the distortion argument set forth by XXXXX is misplaced because Utah is only taxing XXXXX’s income on the basis of its residence (commercial domicile) rather than on the basis of the source of the income. According to Respondent, distortion can only apply to a tax imposed on income based upon the geographical source of the income. Respondent goes on to state that XXXXX is not entitled to relief under Utah Code Ann. §59-7-320 since the allocation of non-business income to the commercial domicile of a taxpayer is fair and equitable, because it has not been subjected to taxation by any other state.
In order to make a determination as to whether the income is business income or non-business income, it appears that the Commission must first make a decision as to the nature of the business of Petitioner. Petitioner has characterized the business as an investment business, whereas Respondent has characterized the business as a sugar business.
In Respondent’s arguments that the business is a sugar business, it refers to the early date of incorporation of XXXXX in the state of Utah, the long standing operation as a XXXXX business operation, the number of full time and seasonal employees devoted to the XXXXX operations, the fact that most of the physical assets owned by the company were dedicated to the XXXXX business, that all of the employees of XXXXX were dedicated to the XXXXX business since there were no employees of XXXXX who worked for the F.E.D. Division, and that F.E.D. did not have any employees.
XXXXX argues that it is an investment business. The largest amounts of time, effort and money have been expended to acquire the numerous businesses in which XXXXX has invested. Very substantial amounts of time and resources have gone into the acquisition of additional companies, and the very large numbers of dollars that have been invested in the securities of other companies, constitute significantly larger investments than exist in the XXXXX operations.
Mr. XXXXX was in control of the operations of XXXXX, and he testified in detail about the amount of time he spent on acquisitions, about his efforts to negotiate with other owners and shareholders, his work to attempt to obtain congressional and union support of at least one acquisition, and substantial travel involved for the acquisitions. He further testified that after 19YY the business of XXXXX was investments, because there was only $$$$$ invested in the XXXXX business. By comparison, the F.E.D. Division had $$$$$ invested in XXXXX, and $$$$$ ultimately invested in XXXXX. From his point of view, XXXXX was an investment business.
There is very little direct testimony that the business of XXXXX remained a XXXXX business. There is evidence from which it might be inferred that XXXXX is in the XXXXX business, but the testimony from all of its officers and key individuals was that it was an investment business and not a XXXXX business. Accordingly, the Commission determines that the most compelling evidence was that XXXXX’s primary business during the audit years was investing in other companies and in fact acquiring other companies to provide the diversification which Mr. XXXXX was seeking to have for his numerous companies.
The conclusion of the Commission that this was substantially an investment business is bolstered by its overall analysis and understanding of what the officers, directors, and board of directors of XXXXX were trying to accomplish. It is very obvious from the testimony that at the time Mr. XXXXX and its entities bought XXXXX, it was not important to them whether XXXXX was in the XXXXX business, or mining, or oil or some other business enterprise. It appears that the primary objective in purchasing the business was the approximately $$$$$ cash which XXXXX had sitting in the bank, which could be used for investing in other companies. The fact that it was a XXXXX business was clearly incidental and not significant in ultimately determining to purchase the company. Instead, it was seen as a vehicle to use the cash to leverage into other business investments.
The goal of leveraging into other business investments was clearly and efficiently carried out by XXXXX. It appears that from the time of acquisition of XXXXX, the officers and directors have deemed it to be an investment business with the profits from the XXXXX business being a nice bonus to receive. However, the XXXXX business was clearly not the primary motivation for the acquisition of the business or for the management and operations of the business from the time of its acquisition.
Having determined that the business is an investment business and not a XXXXX business, it is then necessary to determine whether the income from the sale of the shares of stock in numerous investments was business income or non-business income. However, since the business was an investment business, then it must follow that the sale of the securities which it owned in other businesses was as a result of the business in which it was engaged, and would constitute business income.
The F.E.D. Division, which was the largest and most active portion of the company was involved in purchasing shares of stock in other companies, primarily to control them, to increase the value of those shares of stock, and then to dispose of or liquidate those shares. Accordingly, the Commission finds and determines that XXXXX, from and after the acquisition of the Petitioner by the entities of Mr. XXXXX, became an investment business, primarily concerned about the acquisition and sale of companies and the securities of those companies, and the income from the sales of such securities is therefore business income.
Petitioner has argued that the F.E.D. business is “separate and distinct from the XXXXX business, and as a separate and distinct business it should be taxed only by the state of XXXXX.” However, Utah Code Ann. §59-7-302(10)(1990) says:
“Separate and distinct” means two or more
corporations related through common ownership whose business activities are
unrelated by product, service, or industry and are not vertically or
horizontally integrated.”
While Petitioner acknowledges the presence of that statute, it argues that the Commission should still find that the F.E.D. business and XXXXX business were “separate and distinct” businesses. In support of that proposition it cites Multi-State Tax Commission Regulations IV.1.(B). which provides that “a taxpayer may have more than “one trade or business”.” However, the state of Utah has specifically not adopted that regulation, and has specifically not adopted any other portion of the Multi- State Tax Commission Regulations which refer to multiple trades or businesses within the same company. Based upon that action by the Legislature, and the definition of “separate and distinct” businesses, the legislative intent is clear that it did not intend for Utah law to embody multiple businesses within a single corporation. Although Petitioner argues that substance should prevail over form, the decision to not incorporate the F.E.D. business, or to in some way set it into a separate legal entity, is a decision which was made by the company. XXXXX is not now entitled to the benefit of decisions which it could have made, but did not make. Therefore, the Commission determines that the F.E.D. business was not “separate and distinct” from the XXXXX business. Accordingly, the income from the F.E.D. Division is required by Utah law to be apportioned among the various states along with all other business income of XXXXX.
Petitioner has further suggested that an equitable adjustment should be made by the Commission pursuant to the provisions of Utah Code Ann. §59-7-320, and that pursuant to such equitable adjustment that all of the F.E.D. Division income should be attributed to the state of XXXXX.
That argument of Petitioner ignores the fact that the XXXXX business and the investment business were all part of a unitary business. While the dollars of tax will be higher than for prior years, it is only because the income is significantly higher than it was for prior years.
Petitioner has further argued that the method of taxation imposed results in “distortion.” Petitioner argues that distortion is pursuant to the case of Hans-Rees’ Sons v. North Carolina, 283 U.S. 123 (1931). However, the Hans-Rees distortion case was one in which distortion was determined because the state was allocating the income only on a single factor formula, i.e., the property in the state. In this case, having determined that the income is business income, it will be apportioned pursuant to the standard UDITPA three factor formula. Petitioner has not presented sufficient evidence to show that such apportionment does not allocate a reasonable portion to the state of Utah.
Substantial evidence was presented in the hearing by both parties as to whether the commercial domicile of XXXXX was Utah or XXXXX and, under the audit assessment made by Respondent, it was a significant issue. However, in view of the determination of the Commission that the company had changed primarily to an investment business, and that the income at issue in this proceeding is therefor business income, which should be apportioned, it is not necessary for the Commission to determine whether Utah or XXXXX was the commercial domicile of XXXXX during the audit period.
DECISION AND ORDER
Based upon the evidence presented at the hearing, the Commission hereby finds that the income which resulted from the various investments of Petitioner was business income which should be apportioned pursuant to the standard UDITPA three factor formula set forth in Utah Code Ann. §59-7-311. The Commission therefore finds that the audit assessment made by Respondent against Petitioner should be modified, adjusted and amended, and Respondent is directed to revise its audit assessment in accordance with this decision. Following such amendment to the audit assessment, if there are further disputes regarding the amount of such assessment, those disputes may be presented to the Commission by further proceedings.
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