Kennecott Copper Corp. v. State Tax Commission

493 P.2d 632, 27 Utah 2d 119, 1972 Utah LEXIS 923

• Court: Utah Supreme Court
• Decided: January 24, 1972
• Docket: 12498
• Status: Published

Opinions

TUCKETT, Justice:

Certiorari to the State Tax Commission to review a decision of the Commission assessing a deficiency franchise tax assessment against- plaintiffs for the years 1967 and 1968.

Kennecott Copper Corporation is a New York corporation and the other corporations named as plaintiffs herein are wholly owned subsidiary corporations of Kenne-cott and all have qualified to do business in the state of Utah.

These proceedings resulted after the auditing division of the State Tax Commission proposed a deficiency assessment against Kennecott and its affiliated corporations and plaintiffs herein for the years 1967 and 1968 in the sum of $2,444,101.62. Kennecott filed its petition requesting a re-determination by the Commission. After a hearing before the Commission the proposed deficiency assessment by its auditing division was modified and a deficiency assessment in the sum of $2,313,507.72 was found due and payable. Kennecott is here seeking a reversal of the decision of the Commission.

Kennecott is a worldwide business organization which is principally devoted to the mining, recovery, refining and the fabrication of metals. Kennecott and affiliated corporations named as plaintiffs in these proceedings own and operate mining properties in the states of Utah, New Mexico, Arizona and Nevada.

For the years 1962 through 1966, Kenne-cott filed its franchise tax returns in accordance with an agreement worked out between the Tax Commission and Kenne-cott. In 1967, the Legislature adopted, with some modifications, the Uniform Division of Income For Tax Purposes Act proposed by the National Conference of Commissioners On Uniform State Laws. The formula for apportionment of business income is set forth in Section 59-13-86, U.C.A.1953 as amended which provides 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.

The property factor mentioned in the formula is defined in Section 59-13-87, in the following language:

The property factor is a fraction, the numerator of which is the average value of the taxpayer’s real and tangible personal property owned or rented and used in this state during the tax period and the denominator of which is the average value of all the taxpayer’s real and tangible personal property owned or rented and used during the tax period.

The payroll factor is defined in Section 59-13-90, as follows:

The payroll factor is a fraction, the numerator of which is the total amount paid in this state during the tax period by the taxpayer for compensation, and the denominator of which is the total compensation paid everywhere during the tax period.

The sales factor of the formula is defined in Section 59-13-92, as follows:

The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this state during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period.

Section 59-13-93 defines sales of tangible personal property in the following language :

Sales of tangible personal property are in this state if the property is delivered or shipped to a purchaser within this state regardless of the f.o.b. point or other conditions of the sale.

The Uniform Act contained a further provision:

The property is shipped from an office, store, warehouse, factory, or other place of storage in this state and . the taxpayer is not taxable in the state of the purchaser.

Kennecott filed its franchise tax returns for the years 1967 and 1968 in accordance with the formula set forth in the 1967 Act. The use of the formula resulted in a sharp decline in the franchise taxes due the state of Utah for those years. The auditing division of the Tax Commission was of the opinion that the consolidated returns filed by Kennecott did not fairly reflect the extent of its business activity in Utah and proceeded to re-examine Kennecott’s returns and to make its own determination. The reassessment and redeterminati'on in these proceedings by the Commission were had pursuant to the provisions of Section 59-13-95 which is as follows:

If the allocation and apportionment provisions of this act do not fairly represent the extent of the taxpayer’s business activity in this state, the taxpayer may petition for or the state tax commission may require, in respect to all or any part of the taxpayer’s business activity, if reasonable:

(a) separate accounting;

(b) the exclusion of any one or more of the factors;

(c) the inclusion of one or more addi-ditional factors which will fairly represent the taxpayer’s business activity in this state; or

(d) the employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income.

Kennecott’s franchise tax return for the year 1967 reported a property fraction, the numerator of which was $329,428,667.70 and the denominator of which was $775,-807,391.97, resulting in á fraction showing 42.46 plus per cent of its tangible property was located in the state of Utah. The 1968 return showed a property fraction of the numerator of $359,137,292.71 and a denominator of $1,007,313,895.65, resulting in a fraction of 35.65 plus per cent of Kennecott’s total tangible property being in the state of Utah. The payroll factor showed a fraction, the numerator of which was total compensation paid in Utah and the denominator of compensation paid everywhere. The numerator in 1967 was $44,142,556.24 and the denominator of $102,926,954.90, resulting in a fraction of 42,88 plus per cent of the total payroll of Kennecott in this State. In 1968, the numerator was $55,369,136.34 and the denominator of $166,040,056.94 for compensation paid everywhere resulting in a fraction of 33.36 plus per cent of the total payroll of Kennecott being charged to its Utah division. The sales factor as shown by the return for 1967 showed a numerator of $3,-308,738.42 and a denominator of $397,937,-486.78, which resulted in apportionment fraction of 0.831 plus per cent of gross sales attributable to the state of Utah. The 1968 return showed a fraction of 0.568 plus per cent of its gross receipts from sales arising from Utah operations. The language of Section 59-13-92 above referred to “sales of the taxpayer in this state” would seem to omit the sales of products shipped to a purchaser outside of Utah. The use of this factor tended to greatly diminish the amount of the franchise taxes due under the returns filed by Kennecott for the years 1967 and 1968 and resulted in the Commission’s modification of the formula under the relief provisions of Section 59-13-95. Kennecott’s tax return for the year 1967 showed a net income of $39,868,473.91 for the affiliated group and of that sum $4,645,102.31 was allocated to Utah. Also, the 1968 return reported a net income of $78,331,527.93 and the sum of $7,763,163.36 was allocated to activities in Utah.

In the year 1967, Kennecott for the purposes of computing its depletion allowance, reported gross receipts for sales from its Utah division in the sum of $158,268,903.91. After deducting certain post-mining costs, selling expenses and other expenses and losses, it reported an income for depletion purposes from the Utah division of $117,443,496.51. After deducting mining and concentrating expenses Kennecott reported a net income from its Utah division of $33,380,443.69. Likewise for the year 1968 Kennecott claimed a far greater net income from its Utah operations for the purpose of calculating its depletion allowance than the net income reported on its franchise tax return.

It is Kennecott’s contention that the Legislature having adopted a formula for apportionment of business income to the State, the Tax Commission was not authorized to depart from that formula and to make its own allocation. The Legislature which adopted the Act as a proposed uniform state law also included within the Act the provisions of Section 59-13-95, U. C.A.1953 as amended, which authorizes the Tax Commission to employ another method to effectuate an equitable allocation of the taxpayer’s income if the apportionment provisions of the Act do not fairly represent the extent of the taxpayer’s business activity in this State. It should be noted that the provisions of the last-mentioned section may be invoked at the instance of the Commission or at the behest of the taxpayer. We do not construe the statute as limiting the Commission to the use of the formula in all cases. The record supports the Commission’s conclusion that the use of the formula did not fairly represent the extent of Kennecott’s business activity in this State during the years 1967 and 1968. The right of the Commission to depart from the statutory formula has been before this Court on prior occasions construing statutes containing dissimilar language but of similar import.¹

Kennecott contends that the decision of the Tax Commission violates the provisions of the commerce clause (Article I, Sec. 8, Cl. 3) and the Fourteenth Amendment to the United States Constitution. The Utah act we are here dealing with does not seek to impose a tax upon income or business done outside the state of Utah. The act only seeks to impose a tax upon that portion of Kennecott’s income which is derived from its business activity in this State. We are of the opinion that the statute and the decision of the Commission do not infringe constitutional rights of Kennecott.²

Kennecott further urges that the Commission was in error in its redetermination of the depletion allowances claimed for the years here in question. We conclude that the action of the Commission in this regard was proper and within the prior decisions of this Court.³

Kennecott further contends that the Commission erred in its allocation of deductible federal income tax to the Utah affiliated group. This matter was handled in accordance with the regulation of the Commission rather than federal regulations. Kennecott was bound by the regulations of the Commission and we perceive no error in its application.

Kennecott claims that the Commission abused its discretion in assessing interest on the tax deficiencies. This is a matter solely within the discretion of {he Commission and we see no reason to substitute our judgment for that of the Commission.

After a careful consideration of the entire record we discern no error which would justify a reversal of the decision of the Tax Commission, and the same is affirmed. No costs awarded.

ELLETT and CROCKETT, JJ., concur. HENRIOD, J., having disqualified himself did not participate herein.

1 . California Packing Corp. v. State Tax Commission, 97 Utah 367, 93 P.2d 463. Kennecott Copper Co. v. State Tax Commission, 118 Utah 140, 221 P.2d 857. These eases dealt with the provisions of Subsection 8 of Section 80-13-21 U.C.A. 1943 which provides as follows: “If in the judgment of the tax commission the application of the foregoing rules does not allocate to this state the proportion of net income fairly and equitably attributable to this state, it may with such information as it may be able to obtain make such allocation as is fairly calculated to assign to this state, the portion of net income r-easonably attributable to the business done within this state and to avoid subjecting the taxpayer to double taxation.”

Western Contracting Corp. v. State Tax Commission, 18 Utah 2d 23, 31, 414 P.2d 579, 585.

2 . General Motors Corp. v. Washington, 377 U.S. 436, 84 S.Ct. 1564, 12 L.Ed.2d 430; General Motors Corp. v. District of Columbia, 380 U.S. 553, 561, 85 S.Ct. 1156, 14 L.Ed.2d 68; Illinois Central R. R. Co. v. Minnesota, 309 U.S. 157, 60 S.Ct. 419, 84 L.Ed. 670.

3 . Section 59-13-7(8) (9) U.C.A.1953; Kennecott Copper Co. v. State Tax Commission, 118 Utah 140, 221 P.2d 857 (Supra); Kennecott Copper Corp. v. State Tax Commission, 5 Utah 2d 306, 301 P.2d 562.