No. 80-375
IN THE SUPRE??E COURT OF THE STATE OF Pl0NTATJ.A
1983
RUSSELL STOVE2 CANDIES, I N C . ,
Respondent and A p p e l l a n t ,
DEPART'MENT O KEVENUF: O F TI-IE STATE
F
O FO J A J ,
F I TT EA
A p p e l l a n t and Respondent.
Appeal f r o n : The D i s t r i c t C o u r t o f t h e F i r s t J u d i c i a l D i s t r i c t ,
I n and f o r t h e County o f Lewis E C l a r k . ,
The H o n o r a b l e P e t e r N e l o y , J u d g e p r e s i d i n g *
C o u n s e l of R e c o r d :
For Appellant:
Ward A. Shanahan: Gough, S h a n a h a n , J o h n s o n & V a t e r m a n ,
H e l e n a , Montana
T e r r y E. C o s g r o v e ; Luxan & Y u r f i t t , .Eel-ena, Yontana
Michael R i e l e y , D e p t . o f Revenue, ITelena, Xontana
Submitted: March 3 1 , 1 9 8 3
Decided: May 1 9 , 1983
Flled:
MAY 1 9 1983
&_
.- .
- Clerk
Mr. C h i e f J u s t i c e F r a n k I. H a s w e l l d e l i v e r e d t h e O p i n i o n o f
the Court.
The D e p a r t m e n t o f Revenue ( D O R ) a p p e a l e d t h e L e w i s a n d
C l a r k C o u n t y D i s t r i c t C o u r t j u d g m e n t r e v e r s i n g t h e S t a t e Tax
A p p e a l Board ' s (STAB) d e t e r m i n a t i o n t h a t t h e Montana d i v i -
sions of the Ward Paper Box Co. (Ward), appellant, now
Russell Stover Candies, Inc., were taxable as part of a
u n i t a r y b u s i n e s s . The D i s t r i c t C o u r t h e l d t h a t a s s e s s m e n t o f
income taxes based on appropriation of income was thus
improper. This Court reversed t h e D i s t r i c t Court decision.
R u s s e l l S t o v e r a p p e a l e d t o t h e U n i t e d S t a t e s Supreme C o u r t
which vacated our judgment and remanded the case t o this
Court for reconsideration in light of two United States
Supreme C o u r t c a s e s d e c i d e d s u b s e q u e n t t o o u r d e c i s i o n .
W e a f f i r m our previous d e c i s i o n .
The f a c t s a r e w e l l s t a t e d i n o u r i n i t i a l o p i n i o n , Ward
P a p e r Box Co. v . DOR ( 1 9 8 1 ) , Mont. , 638 P.2d 1 0 5 3 ,
38 S t . R e p . 4147. However, t h e y w i l l be b r i e f l y s e t o u t h e r e .
Ward f i l e d Montana c o r p o r a t i o n l i c e n s e t a x r e t u r n s f o r
1 9 7 1 t h r o u g h 1 9 7 5 b a s e d on t h e s e g r e g a t e d income f r o m i t s
Montana operations alone. DOR audited Ward's records,
d e t e r m i n e d t h a t Ward was a u n i t a r y b u s i n e s s n o t e n t i t l e d t o
s e p a r a t e accounting of i t s Montana o p e r a t i o n s a n d income,
and assessed additional corporation license taxes against
Ward by u s e of a t h r e e - f a c t o r f o r m u l a which a p p o r t i o n e d t o
Montana p a r t o f W a r d ' s t o t a l income.
Ward p r o t e s t e d t h i s a s s e s s m e n t t o STAB which a f f i r m e d
t h e a s s e s s m e n t by DOR. Ward f i l e d a p e t i t i o n f o r r e v i e w i n
t h e D i s t r i c t C o u r t of L e w i s and C l a r k C o u n t y . On A u g u s t 4 ,
1980, the D i s t r i c t Court reversed t h e STAB d e c i s i o n . DOR
appealed t o t h i s C o u r t from t h e judgment of the District
Court .
Ward was a M i s s o u r i c o r p o r a t i o n q u a l i f i e d and doing
business in Montana, maintaining its principal place of
b u s i n e s s i n Kansas C i t y , Kansas. All of i t s common s t o c k
was owned by Louis Ward during the period in question.
Ward's a c t i v i t i e s c o n s i s t e d of seven d i v i s i o n s ; the divi-
s i o n s l o c a t e d o u t s i d e Montana were i n v o l v e d i n m a n u f a c t u r e ,
s a l e a n d d i s t r i b u t i o n o f p a p e r b o x e s and p a p e r box p r o d u c t s
i n t h e S t a t e s of K a n s a s , M i s s o u r i , C o l o r a d o , S o u t h C a r o l i n a
and V i r g i n i a . The Montana d i v i s i o n s c o n s i s t e d o f two c a t t l e
r a n c h e s , o n e i n Meagher C o u n t y and o n e i n P o w e l l C o u n t y .
For t h e y e a r s 1 9 7 1 t h r o u g h 1 9 7 5 , Ward u s e d t h e s e p a r -
a t e a c c o u n t i n g method f o r f i l i n g i t s Montana t a x r e t u r n s a n d
i n each year paid t h e minimum c o r p o r a t i o n license tax of
$50. D u r i n g t h o s e y e a r s t h e o p e r a t i n g c o s t s and d e p r e c i a -
t i o n expenses of t h e Montana d i v i s i o n s e x c e e d e d t h e income
e a r n e d by t h o s e d i v i s i o n s .
During t h e same t i m e p e r i o d , Ward filed tax returns
under t h e u n i t a r y a p p o r t i o n m e n t method i n t h e o t h e r s t a t e s
i n which i t was o p e r a t i n g , and t h e Montana r a n c h d i v i s i o n s
were i n c l u d e d a s p a r t of its t o t a l unitary business. In
those states the losses sustained by the ranch divisions
were used to offset income earned by the paper box
divisions.
The f a c t s r e g a r d i n g W a r d ' s o p e r a t i o n s d u r i n g t h e y e a r s
i n question are for t h e most p a r t u n c o n t e s t e d . The home
o f f i c e i n Kansas C i t y p r o v i d e d a d m i n i s t r a t i v e s e r v i c e s f o r
a l l d i v i s i o n s of Ward's o p e r a t i o n which i n c l u d e d p r e p a r i n g
f e d e r a l and s t a t e r e p o r t s , h i r i n g t h e a c c o u n t a n t s t o p r e p a r e
tax returns, keeping t h e books, preparing financial s t a t e -
m e n t s and b a l a n c i n g c h e c k b o o k s . Each o f t h e d i v i s i o n s was
charged an a r b i t r a r y f i g u r e of $ 6 0 p e r month f o r t h e home
office services. T h i s f i g u r e was n o t b a s e d o n t h e amount o f
t i m e a c t u a l l y s p e n t on e a c h d i v i s i o n by home o f f i c e p e r s o n -
nel.
Ward's d i v i s i o n s d i d n o t exchange equipment o r person-
nel and d i d n o t p u r c h a s e p r o d u c t s jointly. T h e r e was n o
j o i n t a d v e r t i s i n g p r o g r a m among t h e v a r i o u s d i v i s i o n s a n d n o
common s a l e s m e n .
T h e r e were two a c c o u n t s m a i n t a i n e d f o r e a c h d i v i s i o n ,
an expense bank account and a payroll account. Each
d i v i s i o n ' s e x p e n s e bank a c c o u n t was m a i n t a i n e d i n a bank i n
Kansas City. Any monies generated by a division were
deposited i n t h a t d i v i s i o n ' s s e p a r a t e expense account. If
t h e d i v i s i o n d i d n o t i m m e d i a t e l y n e e d t h e f u n d s , t h e y would
be transferred from t h e s e p a r a t e d i v i s i o n e x p e n s e a c c o u n t
i n t o a g e n e r a l a c c o u n t and would b e u t i l i z e d w h e r e v e r n e e d e d
by any of the separate divisions. The p r e s i d e n t of the
company would make t h e d e c i s i o n a s t o t h e t r a n s f e r . Excess
f u n d s would b e i n v e s t e d , i f n o t n e e d e d by a n y o f the divi-
sions. A portion of t h e short-term i n v e s t m e n t income was
a t t r i b u t a b l e t o f u n d s g e n e r a t e d i n Montana, y e t t h e p o r t i o n
a t t r i b u t a b l e t o f u n d s e a r n e d i n Montana c o u l d n o t be s p e c i -
f i c a l l y identified or segregated.
If either of the Montana ranch divisions did not
g e n e r a t e enough income t o m e e t e x p e n s e s , additional funds
would be transferred from Ward's general account to the
r a n c h d i v i s i o n ' s e x p e n s e bank a c c o u n t .
The payroll account for each ranch division was
m a i n t a i n e d i n a Montana bank and c h e c k s c o u l d b e w r i t t e n on
t h e a c c o u n t by t h e r a n c h m a n a g e r . However, t h e home o f f i c e
personnel maintained the records, balanced the books and
made t h e d e p o s i t s .
T h e r e was some c e n t r a l management o f t h e c o r p o r a t i o n .
From t h e e v i d e n c e p r e s e n t e d a t t h e h e a r i n g , STAB f o u n d t h a t
t h e home o f f i c e made all of the decisions regarding the
f i n a n c i a l a f f a i r s of t h e c o r p o r a t i o n and t h a t m a j o r d e c i -
sions regarding the ranches, such as the purchase of
e q u i p m e n t and t h e b u y i n g a n d s e l l i n g o f c a t t l e , r e q u i r e d t h e
approval of t h e chairman of t h e board o r the president of
the corporation.
We reversed t h e decision of t h e D i s t r i c t Court and
h e l d t h a t t h e ranch d i v i s i o n s were p a r t o f Ward's u n i t a r y
business.
Our d e c i s i o n was f o u n d e d upon t h e s t a t u t o r y d e f i n i t i o n
of a u n i t a r y b u s i n e s s . S e c t i o n 15-31-301(2), PICA, defines
the unitary business principle. It reads:
" ( 2 ) A c o r p o r a t i o n engaged i n a u n i t a r y
b u s i n e s s w i t h i n and w i t h o u t Montana m u s t
a p p o r t i o n i t s b u s i n e s s income a s p r o v i d e d
f o r u n d e r 15-31-305. A b u s i n e s s is u n i -
t a r y when t h e o p e r a t i o n of t h e b u s i n e s s
w i t h i n t h e s t a t e i s d e p e n d e n t upon o r
contributory t o t h e operation of t h e
business outside the s t a t e or i f the
u n i t s o f t h e b u s i n e s s w i t h i n and w i t h o u t
t h e s t a t e a r e c l o s e l y a l l i e d and n o t
c a p a b l e of separate maintenance a s
independent businesses."
T h i s r u l e a p p l i e d throughout t h e e n t i r e period of t h e
dispute, f i r s t a s a n a d m i n i s t r a t i v e r e g u l a t i o n and t h e n a s
t h e a b o v e s t a t u t e i n which t h a t r e g u l a t ' i o n was c o d i f i e d . We
c o n c l u d e d from t h e f a c t s o f t h e c a s e t h a t Ward's operation
w i t h i n Montana was d e p e n d e n t upon and c o n t r i b u t i n g t o i t s
o p e r a t i o n o u t s i d e Montana. T h u s , t a x i n g a p p o r t i o n e d income
of Ward's overall o p e r a t i o n was n o t v i o l a t i v e o f t h e due
process clause.
After our decision, Russell Stover Candies, Inc.,
acquired all interest in Ward. It then appealed to the
United States Supreme Court.
The United States Supreme Court vacated tne judgment
and remanded the cause to this Court for further considera-
tion in light of two United States Supreme Court cases:
F.W. Woolworth Co. v. Taxation and Revenue Dept., New Mexico
(1982), 458 U.S. I - S.Ct. , 73 L.Ed.2d 819, 50 USLW
4457, and ASARCO, Inc. v. Idaho State Tax Commission (1982),
458 U.S. -I - S.Ct. , 73 L.Ed.2d 787, 50 USLW
4962.
We affirm our initial decision.
In both of the above cases, taxpayer corporations were
appealing state court decisions allowing revenue departments
to include income earned through investment subsidiaries in
the total "business income" to be apportioned for taxing
purposes. The Supreme Court determined that the subsidi-
aries were separate and discrete businesses and income from
such entities could not increase the income of the parent
corporation that was to be apportioned. Taxing such income
was a violation of the due process clause as no relationship
exists between income produced by subsidiaries and the value
of transacting business within the state. Mobil Oil Corp.
v. Commissioner of Taxes (1980), 445 U.S. 425, 100 S.Ct.
1223, 63 L.Ed.2d 510; Ploorman Mfg. Co. v. Bair (1978), 437
U.S. 267, 98 S.Ct. 2340, 57 L.Ed.2d 197.
In ASARCO, Idaho tried to levy corporate income taxes
on the corporation based on income, increased by dividends,
interest and stock sales from ASARCO's major interests in
five foreign subsidiaries. The S t a t e Supreme C o u r t a p p r o v e d
this practice, and ASARCO appealed to the United States
Supreme C o u r t .
The C o u r t a p p l i e d t h e u n i t a r y b u s i n e s s p r i n c i p l e , b e s t
e x p l a i n e d i n Mobil O i l , supra. I t found t h a t t h e s u b s i d i -
a r i e s i n q u e s t i o n were s e p a r a t e b u s i n e s s e n t i t i e s .
ASARCO had a m a j o r i t y i n t e r e s t i n S o u t h e r n P e r u Copper
C o r p o r a t i o n , b u t d u e t o a management a g r e e m e n t , i t c o u l d n o t
assume c o n t r o l o f the subsidiary. Further, Southern Peru
d i d n o t seek d i r e c t i o n f r o m ASARCO. The m a j o r i t y o f MIM
Holdings, Ltd., i n A u s t r a l i a was owned by ASARCO, b u t no
c o n t r o l was a s s e r t e d n o r d i d it e l e c t any board members,
a p p o i n t any o f f i c e r s o r h i r e any s t a f f . I n two o t h e r s u b s i -
d i a r i e s , ASARCO o n l y h e l d m i n o r i t y i n t e r e s t s , and t h e c o u r t
h e l d t h e y w e r e autonomous o p e r a t i o n s . F i n a l l y , t h e Mexican
s u b s i d i a r y was o n c e w h o l l y owned by ASARCO b u t a Mexican l a w
f o r c e d it t o d i v e s t 51 p e r c e n t of i t s ownership.
I d a h o urged t h e C o u r t t o expand t h e u n i t a r y b u s i n e s s
p r i n c i p l e t o i n c l u d e a n y income r e c e i v e d by a p a r e n t c o r p o r -
a t i o n t h a t would a d d t o t h e g e n e r a l c a p i t a l o f t h a t c o r p o r a -
tion. The Court refused this interpretation because it
would r e s u l t i n t a x i n g r e t u r n s on a n y c o r p o r a t e i n v e s t m e n t
as " b u s i n e s s income," even though r e c e i v e d from a t o t a l l y
independent e n t i t y .
The same general question was raised in Woolworth.
The taxpayer c o r p o r a t i o n owned four foreign subsidiaries.
New Mexico apportioned Woolworth's income for taxing
p u r p o s e s and i n c l u d e d i n s u c h income d i v i d e n d s p a i d by s u b -
s i d i a r ies. The c o r p o r a t i o n a p p e a l e d t h e New Mexico Supreme
C o u r t ' s a p p r o v a l of t h i s a c t i o n .
As in ASARCO, the United States Supreme Court applied
the unitary business principle and found the subsidiaries to
be separate business entities. It determined that the
potential to control is insufficient to find a unitary
business. Moreover, mere financial advantage achieved from
dividends does not warrant a finding that a subsidiary is
part of a unitary business.
The Court concluded that the contribution to income
did not result from functional integration nor centraliza-
tion of management. Functional integration was absent since
the subsidiaries did all their own purchasing, staffing and
training. Further, there was no centralized management.
The subsidiaries had separate and distinct management
personnel and training systems for such personnel. They
made their own management decisions and determined their own
policies. Each subsidiary catered to local needs and
tastes. Each subsidiary was considered autonomous and thus
a separate and discrete business.
There are certain factors that distinguish the present
case from the cases decided by the United States Supreme
Court . First of all, in ASARCO and Woolworth, the
questioned income was derived from foreign investments in
the form of subsidiaries. Here, the ranch divisions were
active operations of Ward. Secondly, in form, each subsidi-
ary is a separate and distinct business. Each had separate
directors, officers and staff. On the other hand, the ranch
divisions were formally part of the Ward corporation. They
were subject to Ward's policies and directives and had to
operate under the auspices of the board and officers. Third,
and most important, there is a striking difference between
t h e p r e s e n t c a s e and t h e U n i t e d S t a t e s Supreme C o u r t c a s e s
regarding t h e i n d e p e n d e n c e o f t h e b u s i n e s s e n t i t i e s .
I n a p p l y i n g t h e s t a n d a r d u t i l i z e d by t h e Supreme C o u r t
vie m u s t a f f i r m o u r i n i t i a l decision. To a s c e r t a i n w h e t h e r
the subsidlarles were part of a unitary business, the
Supreme C o u r t had t o d e t e r m i n e w h e t h e r t h e r e was f u n c t i o n a l
l n t e g r a t l o n and c e n t r a l i z e d management i n t h e r e l a t i o n s h i p
b e t w e e n t h e p a r e n t and s u b s i d i a r y . I n o t h e r w o r d s , t h e C o u r t
f o c u s e d on t h e r e l a t i v e i n d e p e n d e n c e o f t h e s u b s i d i a r y . In
t h e c a s e a t b a r , w e f i n d t h a t t h e r a n c h d i v i s i o n s had v e r y
l i t t l e i n d e p e n d e n c e f r o m t h e o v e r a l l Ward o p e r a t i o n . The
r a n c h d i v i s i o n s and Ward w e r e f u n c t i o n a l l y i n t e g r a t e d . Even
though a s p e c l f i c p r o d u c t d i d n o t e v o l v e from s u c h i n t e g r a -
tlon, functional integration existed with respect to the
o p e r a t i o n of t h e d i v i s i o n . T h e r e was a l s o a l a r g e amount o f
c e n t r a l i z e d management. Since t h e ranch d i v i s i o n s a r e n o t
separate and discrete business entities but part of a
unltary business, the State was correct in taxing Ward,
b a s e d on a p p r o p r i a t i o n o f W a r d ' s t o t a l income.
The Nontana divisions did not have the capacity to
o p e r a t e i n d e p e n d e n t o f Ward. The r a n c h e s d e p e n d e d upon t h e
out-of-state operation for actual services including
p r e p a r a t i o n of f e d e r a l and s t a t e r e p o r t s , tax returns and
financial s t a t e m e n t s and h i r i n g a c c o u n t a n t s t o p e r f o r m s u c h
services. The home o f f i c e a l s o k e p t a l l r e c o r d s and b o o k s
and provided financing when funds in the ranch division
e x p e n s e a c c o u n t were i n s u f f i c i e n t . Further, the directors
and o f f i c e r s c o n t r o l l e d - d i v i s i o n s of Ward, i n c l u d i n g t h e
all
r a n c h divisions. They a p p r o v e d o r made - m a j o r d e c i s i o n s
all
with r e s p e c t t o ranching a c t i v i t y such a s buying equipment
and b u y i n g arid s e l l r n g c a c t l e . If s u c h d e c i s i o n s were n o t
made, t h e r a n c h e s s i m p l y would s t a n d i d l e .
Further, we believe that Ward admitted chat rhe
ranches were part of a unitary business by utilizing the
u n l t a r y b u s i n e s s a p p r o a c h when f i l i n g c o r p o r a t i o n income t a x
forms i n t h e o t h e r s t a t e s where it o p e r a t e d . It considered
t h e r a n c h e s p a r t of its unitary buslness t o set o f f income
earned in those states with losses incurred in Montana.
However, to minimize tax assessment in Montana, Ward
a s s e r t e d t h a t i t was a s e p a r a t e e n t i t y .
We also conclude that the standard utilized by the
Unlced S t a t e s Supreme C o u r t t o d e t e r m i n e i f t h e s u b s i d i a r i e s
I n q u e s t i o n were p a r t of a unitary business is c o n s i s t e n t
wltn t h e standard c o d i f i e d i n s e c t i o n 15-31-381(2), MCA. As
previously discussed, t h e Court focused upon the indepen-
d e n c e of t h e e n t i t y and w h e t h e r i t was c a p a b l e o f s e p a r a t e
maintenance. Our s t a t u t e a l s o k e y s upon t h e d e p e n d e n c e upon
the "out of state" operation and whether the entity is
cdpable of s e p a r a t e maintenance a s an independent business.
R u s s e l l S t o v e r a l s o q u e s t i o n s t h e c o n s t i t u t i o n a l i t y of
the formula used to apportion to tne state income to be
taxed. We do not consider this issue for the following
reasons. F i r s t o f a l l , t h i s q u e s t i o n was n o t r a i s e d i n t h e
lnitial appeal to this Court. Second, t h e United States
Supreme Court did not address this issue in its remand
order. Finally, neither party adequately briefed this
Issue. In fact, tne appellant mentions it for the sole
p u r p o s e t o i n s u r e t h a t i t i s n o t deemed w a i v e d .
Affirmed.
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~~wuL.4, Chief J u s t i c e