VIRGINIA ELECTRIC AND POWER COMPANY
v.
James S. CURRIE, Commissioner of Revenue of the State of North Carolina.
No. 459.
Supreme Court of North Carolina.
February 3, 1961.*162 W. T. Joyner, W. T. Joyner, Jr., Raleigh, John W. Riely, Richmond, Va., Joyner & Howison, Raleigh, Hunton, Williams, Gay, Powell & Gibson, Richmond, Va., for plaintiff, appellant.
T. W. Bruton, Atty. Gen., Peyton B. Abbott, Asst. Atty. Gen., Lucius W. Pullen, Asst. Atty. Gen., and Thomas L. Young, Asst. Atty. Gen., for the State.
PARKER, Justice.
The standard to be applied in a suit to recover a state tax paid under protest is set forth in G.S. § 105-267. The relevant part of the statute is: "If upon the trial it shall be determined that such tax or any part thereof * * *, was for any reason invalid or excessive, judgment shall be rendered therefor, with interest, and the same shall be collected as in other cases."
G.S. § 105-134 in effect during the year 1953 is applicable here, not G.S. § 105-134 as it now appears due to changes made in later years by the Legislature. VEPCO'S brief is based on G.S. § 105-134 in force for the year 1953.
Since VEPCO operates in three States, its net income must be allocated to North Carolina. A state in attempting to put upon a business extending into several states "its fair share of the burden of taxation" is "faced with the impossibility of allocating specifically the profits earned by the processes conducted within its borders," Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 41 S. Ct. 45, 47, 65 L. Ed. 165, and as a matter of practical tax administration it has been "declared that `rough approximation rather than precision' is sufficient," International Harvester Co. v. Evatt, 329 U.S. 416, 422, 67 S. Ct. 444, 447, 91 L. Ed. 390, 395.
The statutory allocation formula applicable to VEPCO for the year 1953 is set forth in G.S. 105-134-II-3, in force in 1953 as follows: "The total income of such corporation shall be apportioned to North Carolina on the basis of the ratio of its gross receipts in this state during the income year to its gross receipts for such year within and without the state."
For the year 1953 VEPCO filed a state income tax return in accord with the above statutory allocation formula showing tax due at 6% (G.S. 105-134-II-3) in the amount of $77,574.66. It did not pay this tax. The State Tax Review Board, after considering VEPCO'S petition for review of apportionment of net income for the year 1953, in accordance with the powers vested in it by G.S. 105-134-II-4, upheld its contention that the statutory allocation formula, G.S. 105-134-II-3, has operated and will operate so as to subject VEPCO to taxation on a greater portion of its net income than is reasonably attributable to its business or earnings within the State. Whereupon, the State Board of Tax Review, acting pursuant to the powers vested in it, held that the allocation of VEPCO'S net income to North Carolina on the basis of the arithmetical average of the gross receipts ratio and the salaries and wages ratio, as requested by VEPCO in its petition to the State Board of Tax Review in one of its prayers for alternative relief, and which would show a tax due to North Carolina in the sum of $65,548.27, more accurately reflects VEPCO'S net income reasonably attributable to North Carolina than does the statutory allocation formula required by G.S. 105-134-II-3, and more accurately reflects VEPCO'S net income reasonably attributable to this State than would the substitution of the salaries and wages factor as authorized by G.S. 105-134-II-4. Defendant assessed VEPCO with an income tax of $65,548.27, less the amount of $19,078.97 it had already paid on one of the income tax returns it filed, for the year 1953, in accordance with the allocation formula based on the gross receipts ratio and the salaries and wages ratio. It is to be noted that VEPCO in its petition, above set forth, states in respect to the allocation formula of its net income to North Carolina on the basis of the arithmetical average of the gross receipts and the salaries and *163 wages ratio: "While the allocation on this basis is not as just, fair or proper as the separate accounting method or as equitable as the use of the wage factor alone it is, nonetheless more equitable than allocation by use of the gross receipts factor alone." VEPCO in this petition does not state, nor even intimate, that a State income tax levied in accord with this allocation formula would be excessive, or levied in accord with this allocation formula would be on a greater portion of its net income than is reasonably attributable to its business or earnings within this State.
VEPCO in its brief states two questions are presented for decision: One, was not the income tax exacted by defendant for the year 1953 excessive? Two, was not the exaction of the tax a deprivation of VEPCO'S property without due process of law and an unconstitutional burden on interstate commerce?
Norfolk & W. R. Co. v. State of North Carolina, 297 U.S. 682, 56 S. Ct. 625, 628, 80 L. Ed. 977, was an action to recover back the amount of a state income tax paid by an interstate railroad company as having been improperly assessed. The Court said: "We must bear in mind steadily that the burden is on the taxpayer to make oppression manifest by clear and cogent evidence."
Butler Brothers v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 704, 86 L. Ed. 991, was a suit to recover back a corporate franchise tax. In that case the Court says: "One 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."
VEPCO contends that the tax assessed under the allocation formula of the gross receipts ratio and the salaries and wages ratio is shown by its evidence to be excessive. Its evidence falls into two categories.
First. Its territory in northeastern North Carolina is largely agricultural and thinly settled. Its territory in Virginia includes the largest metropolitan areas. Its rates everywhere are the same. There are 24 customers per mile outside of North Carolina, and 10 in North Carolina. Investment in distribution facilities per customer is $401 in North Carolina, and $266 elsewhere. Each added dollar of investment means more taxes and depreciation, which must be deducted to reach net income. Revenue per kilowatt hour was $1.50 in North Carolina and $1.96 elsewhere. Taxes are heavier in North Carolina. Practically all of its generating facilities are in Virginia.
Second. VEPCO maintains in its books of account a detailed allocation of receipts and expenditures attributable to its North Carolina operations, which shows a net income of $317,114, and an income tax due to North Carolina for 1953 of $19,026.84.
A. M. Clement, assistant treasurer of VEPCO, testified that VEPCO keeps a detailed allocation of receipts and expenses which shows the income attributable to its business in North Carolina, and that the State Utilities Commission considered the earnings of VEPCO thus shown in the rate case in which increases were granted in June 1954. That the test used in the rate case was the 12 months ended 30 September 1953. The data presented in the rate case were prepared on the same separate accounting basis for 1953. The rate of return is based on investment of VEPCO, and not on reproduction cost. The witness was asked a number of other questions in respect to whether the State Utilities Commission accepted these figures, but the judge sustained objections to the questions, though he permitted the witness to put his answers in the record. VEPCO excepted to the judge's rulings, but did not bring forward the exceptions, and discuss them in its brief. Under our rules such exceptions are deemed abandoned. Rule 28, Rules of Practice in the Supreme Court, 221 N.C. 544, 563; Waddell v. Carson, 245 N.C. 669, 97 S.E.2d 222.
*164 Robert S. Boyd, manager of the appraisal division of Stone & Webster Engineering Corporation, testified for VEPCO as an expert on matters of allocation of income. He expressed the opinion that the use of the formula insisted upon by defendant would attribute to North Carolina more income than is reasonably attributable to its operations in North Carolina, and in consequence would attribute to North Carolina income earned outside of North Carolina. He further stated that, in his opinion, VEPCO'S books of account showing a detailed allocation of receipts and expenditures attributable to North Carolina would allot to North Carolina its proper share of VEPCO'S net income.
John Deere Plow Co. of Moline v. Franchise Tax Board, 38 Cal. 2d 214, 238 P.2d 569, 573, appeal dismissed for want of a substantial federal question, 343 U.S. 939, 72 S. Ct. 1036, 96 L. Ed. 1345, was an action to recover an additional franchise tax assessed against it for the year 1938, based upon income for the year 1937. Plaintiff argued that the formula used operated to distort the productivity of its California business, and cannot work properly in reasonably reflecting the proportionate part of the unitary income attributable to California. In reply to this argument, the Court said: "But in so arguing plaintiff fails to take into account the underlying concept of formula apportionment in the allocation of income from a unitary business: that the unitary income is derived from the functioning of the business as a whole, to which the activities in the various states contribute; and that by reason of such interrelated activities in the integrated overall enterprise, the business done within the state is not truly separate and distinct from the business done without the state so as reasonably to permit of a segregation of income under the separate accounting method rather than use of the formula method in assigning to the taxing state its fair share of taxable values."
VEPCO distributes gas only in the Hampton Roads area of Virginia. The North Carolina Tax Review Board by Administrative Order No. 27 held that this distribution of gas was not a part of VEPCO'S unitary business, and directed that any net income from such gas business be excluded from income attributable to North Carolina.
In the apportionment of a unitary business the formula used must give adequate weight to the essential elements responsible for the earning of the income, and must not include income unconnected with the unitary business, but its propriety in a given case does not require that the factors appropriately employed be equally productive in the taxing state as they are for the business as a whole. Varying conditions in the different states wherein the integrated parts of the whole business function must be expected to cause individual deviation from the general average of the factors in the formula equation in all the different states wherein the integrated parts of the whole business function, and yet the mutual dependency of the interrelated activities in furtherance of the entire business sustains the apportionment process. John Deere Plow Co. v. Franchise Tax Board, supra; Ford Motor Co. v. Beauchamp, 308 U.S. 331, 60 S. Ct. 273, 84 L. Ed. 304; In the matter of The North American Cement Corporation v. Graves, 243 A.D. 834, 278 N.Y.S. 920, in Court of Appeals 269 N.Y. 507, 199 N.E. 510, judgment affirmed 299 U.S. 517, 57 S. Ct. 311, 81 L. Ed. 381; Crane Co. v. Carson, 191 Tenn. 353, 234 S.W.2d 644, certiorari denied 340 U.S. 906, 71 S. Ct. 282, 95 L. Ed. 655.
There is "no necessary inconsistency between the accuracy and fairness of the taxpayer's accounting and the different result obtained by the formula method of allocating income," Edison California Stores v. McColgan, 30 Cal. 2d 472, 483, 183 P.2d 16, 23, since "a particular accounting system, though useful or necessary as a business aid, may not fit the different requirements when a state seeks to tax values created by *165 business within its borders," Butler Brothers v. McColgan, 315 U.S. 501, 507, 62 S. Ct. 701, 704, 86 L. Ed. 991, 996, so that for "taxation purposes the one does not impeach the other," Edison California Stores v. McColgan, supra, at page 483 in the California reports, at page 23 in the Pacific Reporter.
It seems the only requirement is that that allocation formula used be not intrinsically arbitrary or produce an unreasonable result. Such was the situation in the case of Hans Rees' Sons v. State of North Carolina ex rel. Maxwell, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879, where the Court recognized the unitary character of the business as a manufacturer and selling enterprise extending into several states and to which a formula method of apportionment was appropriate, but refused to approve the particular formula employed for the reason that it consisted simply of the property factor and failed to give proper weight to the extensive activities of the company without the state, so that the result reached was unreasonable. See Butler Brothers v. McColgan, 17 Cal. 2d 664, 678, 111 P.2d 334, 341, affirmed 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991.
VEPCO in its complaint has no allegation of any kind in respect to the consideration by the State Utilities Commission in fixing rates for its services of its books of account wherein are kept a detailed allocation of receipts and expenses showing the income attributable to its business in North Carolina. Neither has it favored us in its brief with any argument or discussion as to how such consideration is material here. The fixing of rates by the State Utilities Commission to be charged by VEPCO in North Carolina for its services, and the establishment by North Carolina of an allocation formula so that VEPCO will bear its fair share of the burden of taxation in North Carolina, are entirely different matters, and involve different factors.
VEPCO in the petition which it filed with the North Carolina Tax Review Board asking authority to pay its income tax to North Carolina on a separate accounting basis or, in the alternative, on the basis of substitution of the payroll formula for the gross receipts formula or, as a third alternative, in the event neither of the first two alternatives was granted, to allow it to pay an income tax to North Carolina for the year 1953 on the substitution of the average of the gross receipts and payroll ratios for the statutory formula, which petition is set out in full in the statement of facts, sets forth a large part of the facts shown in the first category of its evidence at the hearing before Judge Hobgood. It is reasonable to assume that the additional facts shown in the first category of its evidence before Judge Hobgood was known by VEPCO when it filed this petition. In this petition there is no suggestion or intimation that if VEPCO was allowed to use the third alternative, the tax imposed would be excessive or the taxing of income not fairly attributable to its business in North Carolina. In this petition it is apparent that VEPCO took the position that though it could show by a separate accounting system, its activities in North Carolina were less profitable than those without North Carolina, and what the net earnings in North Carolina was according to its separate accounting system, it did not preclude the use of a formula as a method of apportionment of its unitary income. It is also apparent that VEPCO, when it requested that it be permitted to use the formula here used by defendant, thoroughly recognized the fact that its electric business in North Carolina was an integrated unit in its whole electric business, providing the advantages of a unitary business through unity of ownership, unity of operation by centralized purchasing, management, advertising and accounting, and unity of use in the centralized executive force and general system of operation.
Analyzing the evidence in the record before us, we are of the opinion, and so hold, *166 that VEPCO has not carried the burden "to make * * * manifest by clear and cogent evidence" (Norfolk & W. R. Co. v. North Carolina, supra [297 U.S. 682, 56 S. Ct. 628]) that the additional income tax here imposed is excessive, or that it taxes VEPCO on net income not reasonably attributable to its business in North Carolina, or that the State Tax Review Board abused its statutory discretion, or acted arbitrarily or unlawfully in permitting it to use an allocation formula it requested permission to use. The income tax computed by defendant here on VEPCO for the year 1953 is not open to constitutional objections as operating to tax extraterritorial income in violation of the due process clause of the Fourteenth Amendment to the Federal Constitution, or as being an unconstitutional burden on interstate commerce.
There is competent evidence to support the essential findings of fact, which findings support the conclusions of law made by the hearing judge. It therefore follows that the trial judge properly sustained the additional income tax for 1953 assessed against VEPCO by defendant. All VEPCO'S assignments of error are overruled.
The judgment is
Affirmed.