This is a suit by the Sinclair Refining Company against the State Revenue Commissioner to recover income taxes alleged to have been illegally assessed and collected by the commissioner from this company for the year 1941. During the period in question the Sinclair Refining Company was engaged only in the business of marketing petroleum products in the State of Georgia. It owned refineries in other States and was engaged in refining and marketing crude and refined petroleum products in those States. It also owned pipelines located in a number of States (but not in Georgia) wherein crude oil was shipped by dealers to refineries owned by the Sinclair Company and other oil companies, and the shipper paid the cost of the transportation of the oil through said pipelines. Prior to August, 1936, these pipelines were owned and operated by a different corporation, the Sinclair Prairie Pipeline Company, which was engaged in the business of transporting crude oil, as a common carrier, by and through the system of pipe lines. Its principal office and headquarters were located in Independence, Kansas, where it kept its books and records and from which place it carried on and directed its business. It had no pipe lines in Georgia, did not transport any oil into or through this State, nor did it do any business of any sort in Georgia.
On August 31, 1936, the Prairie Company and Sinclair Company merged into a single corporation under the name "Sinclair Refining Company" (now the petitioner), but the business of transporting crude oil, being the business theretofore engaged in by the Prairie Company, was carried on and operated thereafter by the Sinclair Company as an autonomous department of the merged corporation, and as so conducted will hereafter be referred to as the "Pipeline Department" or the "Department."
The Pipeline Department is carried on, managed and directed from offices at Independence, Kansas. It has no offices, agents or places of business in Georgia, and directions relative to the transportation of crude oil by pipeline neither originate, nor are they carried out, in Georgia. *Page 53
As was the case with its predecessor, the Prairie Company, the Pipeline Department, as such, is a common carrier under the Interstate Commerce Act (Title 49, § 1 (3), U.S.C.A.), and also under the laws of the States where it operates.
The Pipeline Department, as such, files and publishes its tariffs covering its transportation charges with the Interstate Commerce Commission and with the different State bodies in the several States where it has pipelines.
The valuations of the Pipeline Department's property are those put upon it by the Interstate Commerce Commission, and are fixed by the Commission. It keeps its own books and records in accordance with the regulations of the Commission imposed upon it as a carrier subject to the Commission's orders. These books and records are kept at Independence, Kansas. The general books of Sinclair Company are kept in the City of New York. No books, records or other documents pertaining to the business of the Pipeline Department are kept in Georgia.
It is not necessary, in order to determine the profits of the Pipeline Department, to refer to any books or records kept in Georgia or elsewhere than at Independence, Kansas, since the Department's books must, under the rules of the Interstate Commerce Commission be so kept that its, the Department's, profits can be determined therefrom without reference to the general books and records of Sinclair Company.
The revenues of the Pipeline Department are solely those which it obtains from the furnishing of transportation of crude oil as a common carrier, under filed tariffs. In 1941 Sinclair Company received 72.69% of the crude oil thus transported and other refineries received 27.31%.
Sinclair Company has no refineries in the State of Georgia.
Sinclair Company neither has, nor does it operate, any pipelines other than those operated by the Pipeline Department in the manner herein set out. None of these pipelines is in the State of Georgia, being located in the States of Wyoming, Texas, Oklahoma, Kansas, Missouri, Iowa, Illinois and Indiana.
In the State of Georgia Sinclair Company is, and in 1941 was, engaged in the business of marketing petroleum products. Outside of the State of Georgia Sinclair Company is, and during the year 1941 was, engaged in (1) the business of the refining *Page 54 and marketing of crude petroleum and petroleum products, and (2) the business of transporting crude oil by pipeline in, into and through the States heretofore enumerated.
The controlling question for determination, under the record as here presented, is whether or not the Sinclair Refining Company maintained and operated the "Pipeline Department" as a separate, distinct and autonomous unit of its business from that of its business of refining and marketing crude and refined petroleum products inside and outside the State of Georgia. If the Pipeline Department business was operated by the Sinclair Company as a separate and distinct unit or business from that of its business of refining and marketing petroleum products, then no part of the net income of the Pipeline Department was subject to income tax in Georgia, under the law.
The material parts of the plaintiff's petition are set out in the statement of facts preceding Judge Felton's opinion; also, the agreed statement of facts and part of the evidence will be found there. It has been adjudicated on demurrer that the plaintiff's petition set out a cause of action for a refund, and that judgment was not excepted to. I am of the opinion that the admitted portions of the petition, the agreed statement of facts and the evidence sustain the plaintiff's case as made by the petition.
The Code (Ann.), provides, in part: "The tax imposed by this law shall apply to the entire net income, as defined herein, received by every domestic corporation and every foreign corporation owning property or doing business in this State:
"If the entire business income of the corporation is derived from property owned or business done in the State, the tax shall be imposed on the entire business income, but if the business income of the corporation is derived in part from property owned or business done in the State and in part from property owned or business done without the State, the tax shall be imposed only on the portion of the business income reasonably attributable to the property owned and business done within the State, to be determined as follows." See § 92-3113, and the factor ratios therein set out.
As I understand, the Revenue Commissioner used the Three Factor Ratio in making the assessment against the Sinclair Refining *Page 55 Company and thereby taxed income derived from the operations of the Pipeline Department of the taxpayer, along with its refining and sales business. The case of Mexican Petroleum Corp. v.Head, 64 Ga. App. 529 (supra), is somewhat similar to this case. The first headnote in that case is as follows: "The formula provided in the Code, § 92-3113 (3c), as to computing income tax upon the income earned in Georgia of a resident corporation, where the corporation receives an income from business done both within the State of Georgia and without the State of Georgia, is not applicable, under the facts of this case, where the business done by the corporation within this State is separate and distinct from that done without the State, and is carried on as a separate and distinct business from the business done without this State, and the income derived from the business done within this State is ascertainable from the records of the business and transactions of the business carried on within this State." And on page 535 of the opinion in the same case, the court said: "There are some corporations which from their very nature produce an income which can not be properly allocated by separate accounting methods, but that is not the case with the manufacture and sales business, particularly so where the accounts of such operations are so kept as to be readily separable. The theories of allocation can have no place in the inquiry if the net income within the State stands on its own footing unmixed with outside business. So, properly construing the income-tax act of 1931, where a part of the income of a domestic corporation is derived solely and exclusively from business done by it without this State, . . and is carried on through an office maintained by the corporation without this State, and in producing such income no property of the corporation within this State is used, it is our opinion that the formula provided in section 15 (3c) supra of act of 1931 for the allocation of corporate net income for income taxation, is not applicable. It is not the purpose and intent of the act to tax the net income of a domestic corporation derived from property owned or business done outside the State. Under the circumstances here it was not within the discretion of the commissioner to apply the formula which was applied." Under the facts, the Three Factor Ratio was inapplicable in the present case, in my opinion. *Page 56
The fact that the Pipeline Department was owned by Sinclair Refining Company does not necessarily mean that the income derived from the transportation of petroleum products in its pipelines, located outside of Georgia, can be legally taxed in Georgia. If the Pipeline Department was operated as a separate and distinct business unit from that of the business of marketing petroleum products in Georgia and that of refining and marketing such products in other States by the Sinclair Refining Company, then under the record here the income derived by the taxpayer from its pipeline business is not subject to be taxed in this State.
But it is contended on the other hand that the transportation of the crude petroleum products to the refineries, refining these products and then marketing them constituted a unitary business. I do not believe this contention can be legally sustained under the record of this case. As above stated, the mere unity of ownership is not sufficient in itself to make it a unitary business. See, in this connection, Adams Express Company v. Ohio, 165 U.S. 194 (supra); Underwood Typewriter Company v. Chamberlain, 254 U.S. 113 (supra); Hans Rees' Sons v. North Carolina (supra). Prior to August, 1936, these pipelines were owned and operated by a different corporation, Sinclair Prairie Pipeline Company, as a common carrier in transporting crude oil. Its tariffs were fixed by the Interstate Commerce Commission and it was operated as an independent business and, of course, received its own income; and since its merger with the Sinclair Company in 1936, it has been known as the Pipeline Department and has been operated as a separate and distinct business unit of the Sinclair Refining Company and in the same manner that it was operated before the merger. It was not unitary with the refining and marketing business before the merger and, under this record, it seems to me that it was not unitary with such business in the taxable year of 1941.
The business of transporting oil through these pipelines was maintained as an independent business and was capable of earning a profit as such before the merger in 1936; it could be, and was, carried on in the same manner after the merger; and it could now be operated as an independent business by Sinclair, if Sinclair were to retire from the refining and marketing of *Page 57 petroleum products. In other words, it is capable of being carried on as a separate and distinct business. See Maxwell v. Kent Coffey Manufacturing Co., 204 N.C. 365 (supra).
I believe that the judgment in favor of the plaintiff, which was rendered by the trial judge without the intervention of a jury, should be affirmed.