95-1889

CORPORATE FRANCHISE

Signed 12/15/97

BEFORE THE UTAH STATE TAX COMMISSION

____________________________________

PETITIONER )

Petitioner, ) FINDINGS OF FACT,

: CONCLUSIONS OF LAW,

v. ) AND FINAL DECISION

AUDITING DIVISION OF THE ) Appeal No. 95-1889

UTAH STATE TAX COMMISSION, :

) Account No. ##### :

Respondent. ) Tax Type: Corporate Franchise

_____________________________________

STATEMENT OF CASE

This matter came before the Utah State Tax Commission for a Formal Hearing on August 28, 1997. Richard B. McKeown, Commissioner, heard the matter along with Joe B. Pacheco, Commissioner, for and on behalf of the Commission. Present and representing Petitioner was Petitioner's legal counsel, PETITIONERS REP.. Present and representing Respondent was Brian Tarbet, Assistant Attorney General.

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:

FINDINGS OF FACT

1. The tax in question is Corporate Franchise tax.

2. The period in question is 1988.

3. Petitioner is a STATE corporation with its principal place of business in Utah.

4. Petitioner and several of its controlled subsidiaries are in the general and industrial linen supply business. Over the years Petitioner held subsidiaries engaged in the manufacturing business, the food processing business, the savings and loan business, and the lease financing business.

5. In tax year 1988, Petitioner had three controlled subsidiaries, COMPANY A and COMPANY B ("COMPANY A"), COMPANY C, and PETITIONER. The three entities filed on a combined unitary basis for the audit period and previous tax years.

6. In tax year 1988, Petitioner sold its stock in COMPANY A. The sale resulted in a loss of approximately $$$$$. Petitioner reported the loss as a non-business loss on its 1988 return.

7. In tax year 1982, Petitioner had sold its stock in COMPANY Z, a subsidiary of Petitioner. The sale resulted in a gain. Petitioner appealed an audit assessment relating to that gain. Although the Commission initially took the position that the gain was a non-business gain, Petitioner appealed that finding to the Third District Court. In its memorandum decision, issued November 30, 1990, the court held that Steiner and COMPANY Z operated as a unitary business and that the gain was business income.

8. The parties stipulate that the relationship between Petitioner and ASL is approximately the same as the relationship between Petitioner and Steiner Financial.

9. Petitioner filed its 1988 return after the Commission's decision concerning the 1982 audit, but before the Third District Court issued its decision reversing the Commission's finding that the gain a non-business gain.

ISSUE

Is the loss realized by Petitioner on the sale of XXXXX a business or non-business loss?

APPLICABLE LAW

1. Utah Code Ann. '59-7-302 (1) (Supp. 1988) defines "business income" as follows:

"Business income" means income arising from transactions and activity in the regular course of the taxpayer' 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.

2. Utah Code Ann. '59-7-302 (7) (Supp. 1988) defines "non-business income" as follows:

"Non-business income" means all income other than business income.

3. Utah Code Ann. '59-7-302 (15) (Supp. 1988) states, in part:

(a) "Unitary business" . . . mean[s] two or more corporations related through common ownership whose business activities are integrated with, dependent upon and contribute to each other.

(b) "Unitary business" . . . does not include any corporation related by stock ownership or otherwise to any corporation liable to report under . . . [UDITPA] whose principal business activities relate to a separate and distinct line of business.

4. Utah Code Ann. '59-7-302 (3) defines "common ownership" as follows:

"Common ownership" in the case of corporations means the direct or indirect control or ownership of more than 50% of the outstanding voting stock of the corporation carrying on unitary business activity. Unitary business activity can ordinarily be illustrated where the activities of the corporations are:

(i) in the same general line of business. . .;

(ii) steps in a vertically integrated enterprise or process; or

(iii) horizontally integrated; and the corporations are economically interdependent as demonstrated by the exercise of strong centralized management, functional integration, and attainment of operational economies of scale. Tax haven corporations shall be included in the unitary group.

5. Rule 4-508 of the Code of Judicial Administration, which states in part:

(1) Unpublished opinions, order and judgments have no precedential value and shall not be cited or used in the courts of this state, except for purposes of applying the doctrine of the law of the case, res judicata, or collateral estoppel. . .

(3) For purposes of this rule, any memorandum decisions . . . shall be regarded as an unpublished opinion.

ANALYSIS

Because the parties have placed emphasis on the 1990 memorandum decision issued by the Third District Court and the 1987 Commission decision in appeal 84-1111, we begin by discussing the value of those opinions as they relate to the matters at issue here.

Respondent argues that we are bound by the decision of the Third District Court which involved a sale by Petitioner of a different subsidiary. In considering Petitioner's appeal from the Commission's decision in appeal 84-1111, the court overturned the Commission's decision and held that the gain from the sale was business income.

Respondent correctly points out that Utah Code Section 59-1-607 states that a decision of the District Court is a final and binding decision on the matter that is before the court unless it is changed by the decision of a higher court on appeal. However, under Rule 4-508 of the Code of Judicial Administration, the memorandum decision issued by the Third District Court is an unpublished opinion. As such, it is binding on the Commission only so far as the doctrines of the law of the case, res judicata or collateral estoppel apply. The Commission, having elected not to appeal the district court's decision, was bound to apply the district court's directives in that case. The Third District Court's decision had no precedential value with regard to any other audits or appeals before the Commission.^[1]

The court's memorandum decision did not bind the Auditing Division to conclude that Petitioner and XXXXX operated as a unitary business for tax year 1988 nor to conclude that the loss in the 1988 tax year was business income. These fact-specific questions are subject to an independent determination without regard to the court's memorandum decision concerning Petitioner and a different subsidiary, XXXXX.

Petitioner, on the other hand, urges that the Commission's decision in appeal 84-1111 is binding in this matter. Petitioner incorrectly characterizes that decision as rule making by adjudication or as a general statement of tax policy. It did neither. The decision merely represents an application of the law to the specific facts in that case. The decision is not binding with regard to other matters outside that appeal. If the decision has any value here at all, it is in its limited description of the relationship between Petitioner and XXXXX. That is helpful because neither party in this case presented evidence of the relationship between Petitioner and Steiner Financial except to say that it was approximately the same as the relationship between Petitioner and XXXXX.

We turn, then, to the proper characterization of this loss as a business or non-business loss. We begin by noting that in the tax year in question, Petitioner filed a combined tax return as required by Utah law. If XXXXX was part of the unitary group, the loss associated with the sale of XXXXX would be an apportionable business loss unless it was clearly shown to be a non-business loss.

Whether these operations were separate or unitary depends upon the manner in which the business was conducted and the level of integration between them. The parties in this matter presented no evidence as to the nature of these operations. Both parties stipulated that the relationship between Petitioner and XXXXX was approximately the same as the relationship between Petitioner and XXXXX. In the absence of direct evidence on these facts, we are forced to rely on the representations made about the nature of the operations set out in the Commission's decision and the court's memorandum opinion in the XXXXX case. On that basis, we assume the following facts to be true:

1. During the audit period Petitioner owned all or nearly all of the XXXXX stock.

2. An officer of Petitioner corporation served as a director of XXXXX and had veto power over XXXXX's corporate decisions.

3. Petitioner exercised some control over the financial matters of XXXXX relating to budgeting, audits, tax preparation, and financial reporting.

4. During the audit period and in previous tax years, Petitioner held a number of subsidiaries engaged in the financial services industry. Equity and income from these subsidiaries comprised a substantial portion of Petitioner's operations.

5. Petitioner and XXXXX shared a common pension plan and executive bonus plan.

Under Utah Code section 59-7-302(15)(a) (Supp. 1988), Petitioner and XXXXX comprised a unitary business if they were related through common ownership and their business activities were integrated, dependent and contributed to each other. Petitioner was in the financial services business and had controlling ownership of XXXXX by virtue of its stock holdings. There was a managerial link insofar as Petitioner placed an officer on XXXXX's board of Directors who participated in management decisions and held some form of veto power. The entities participated in a common pension and bonus plan. Finally, Petitioner exercised control over XXXXX by imposing on XXXXX certain requirements pertaining to budgeting, auditing and financial reporting. On the basis of these facts, we find sufficient interdependence between Petitioner and XXXXX to treat the operations as a unitary business.

The loss from the sale of XXXXX was a business loss if it arose from "transactions and activity in the regular course of the taxpayer' trade or business . . . ." Utah Code Ann. 59-7-302 (1). 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 statutory definition of business income also 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. Petitioner's loss is apportionable as a business loss if it meets either test.

Under the functional test, 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. Financial services was one of Petitioner's lines of business. The acquisition and disposition of subsidiary operations in the financial services industry contributed to Petitioner's operations and constituted transactions in the regular course of Petitioner's business. Therefore, the loss resulting from the sale of XXXXX was a business loss.

DECISION AND ORDER

Based upon the foregoing, the Tax Commission finds that Petitioner and XXXXX operated as a unitary business and that the loss realized by Petitioner from the sale of XXXXX is a business loss. It is so ordered.

DATED this 15 day of DECEMBER, 1997.

BY ORDER OF THE UTAH STATE TAX COMMISSION.

W. Val Oveson Richard B. McKeown

^[1] This opinion does not consider the impact of the decision of the Utah Supreme Court issued October 7, 1997 in the case of Evans & Sutherland Computer v. Tax Commission.