*1 4H simply money on their borrowed makers proceeds and turned the over to
own credit Corporation. arrangements Their Corporation payment as to notes no interest to us. The notes were are of personal obligations purely simply the holding makers. The court erred otherwise. is
The case reversed and remanded the district court. The trial court is di- judgment to set
rected aside the appeal which this taken. The court is findings and con- directed make of fact principal unpaid of law as to clusions $4,000 notes, balances of the three and as fees in attorney’s to accrued interest and respect to all of the notes mentioned opinion. this Whether additional evidence matters, received as to be to these we leave the trial court’s discretion. trial thereupon court will enter judgment granting the Bank the relief
summarized in paragraph the fourth opinion,
this and denying ap- relief to the pellees on complaints their various
counterclaims. $2,000 Bank allowed serv- attorneys ices of its appeal. SOSA, JJ., MONTOYA concur. 540 P.2d INTERNATIONAL COR- CHAMPION PORATION, Appellant, REVENUE, BUREAU OF Mexico, Appellee. No. 1746. Appeals Court New Mexico.
Aug. 13, 1975. Rehearing Aug. 13, Denied 1975.
Certiorari Denied Oct. *2 White, Koch, Benjamin Phillips, Kelly J. Barron, Fe, McCarthy,
& Santa Dennis J. Beanblossom, Jacobs, David A. Frost & Cincinnati, Ohio, appellant. for Gen., Toney Anaya, Atty. Unna, E. Jan Revenue, Gen., Atty. Bureau of Asst. San- Fe, ta appellee. for
OPINION
SUTIN, Judge. Champion Corporation International appeals (Champion) the Decision and Or- der of the Commissioner of Revenue (Commissioner) which assessed additional income tax for the that Champion Commissioner found erroneously allocated as “nonbusiness come” it received the form rent, interest, gains from the sale of assets. The Commissioner found properly such income classified as 72-15A-17(A), “business under income” 10, pt. 2, (Repl.Vol. N.M.S.A.1953 falls within Supp.). This section the Uni- Purposes for form Division Income Tax Act, “UDITPA”, 72-15A-16 to 72- [§§ 15A-36], provides the uniform which divi- purposes, among tax sion participating states in the Multistate Tax Compact, income of a multistate of the business. See 72-15A-37. corporation
Champion York is a New states, fifty manufacturing engaged, in products, in- selling variety of wood materials, paper, pulp, cluding building furnishings. packaging, and home protested assessment pro- hearing At the on made. assessment, rep- test employee, a by an tax con- solely resented re- prepared sultant. He had not Revenue, 83 N.M. ex rel. Bureau of the State knowledge He evidenced turns. 386, 387-88, (Ct. 1004-05 P.2d operation of Cham- conglomerate business Champion had App.1971). the burden However, solely relied pion. Mears v. Bu presumption. overcome hearing. Cham- at the this tax consultant Revenue, records, reau N.M. 531 P.2d docu- pion tendered no business *3 (Ct.App.1975). 1213 support its ments or other exhibits to claims. produce has failed to ev Champion by affirmance This case can be decided activity of that its business outside idence ways: us in two The record leaves no (A) dependent independent Mexico or was any on determination basis which to make operations. Champion instate of its Champion’s whether all activities were of. interest, rent, gains to show and failed that part oper- integral an of their New Mexico part integral not an of its busi analysis an the statute (B) ations and of in On the ness carried on New Mexico. application Champion’s and its us, question is facts before raised any its
(A) whether of nonbusiness No Basis to Make Determination that income because there is no evidence “unitary A multistate business is a part unitary of a activities were not purposes business” for income tax when operations state benefit conducted one state of leaves us no ba- the record by operations and are turn benefited any sis on to make determination as which Pipe another Lakes Line state. Great Co. activity to whether business Taxation, v. Commissioner 272 Minn. part their integral was an 403, (1965). 612 “If its vari N.W.2d operations. New Mexico parts interdependent ous are and of mutual conclusion, benefit the assessed addition- integral By so as to form one business entities, rather than several business it is al income tax for the Resources, unitary.” McCoy, Webb affirmed. Inc. v. 758, 766, 879, 194 Kan. 401 P.2d and its (B) Analysis An Statute (1965). Application Income “ hand, On the other . . [I]f that: Champion contends enterprise a multistate business is conduct interest, rents and (1) Its income from one, way ed in a some all of the “nonbusiness the sale of constituted operations business outside [New Mexico] lawfully be taxed income” which could not independent are of and do not contribute by the of New State Mexico. operations
to the business
within this
(2) The
attributable to
amount that was
State,
the factors attributable to the out
timber, and that was
cutting
of its
activity may
side
be excluded.” Common
by
government
taxed
as IRC
federal
Industries,
Incorporated,
wealth v. ACF
gain,
631(a)
was unrealized income
441 Pa.
271 A.2d
280 (1970).
lawfully
by
could not
be taxed
See, Rudolph, State Taxation of Interstate
New Mexico.
Unitary
Concept
Business: The
Business
questions
These
first im-
are matters of
Corporate
and
Groups,
Affiliated
25 Tax
pression in New Mexico.
L.Rev. 171
interest,
log
Income
rents and
from
“Any
assessment of taxes made
income”.
sales constituted “business
presumed
the bureau is
to be correct.”
in-
Section
defines “business
72-15A-17
72-13-32(C),
Section
N.M.S.A.1953 (Repl.
income”,
come”
under
and “nonbusiness
pt.
Supp.).
duty
Vol.
rests
“
UDITPA, as follows:
present
evi
tending
dispute
dence
A. “Business income” means
the factual cor
activity in
arising
rectness
from transactions and
of the assessments.” McConnell v.
capital
taxpayer's
earned in the
course
business. Rath-
regular
large
includes income
er than have a
cash balance in the
trade
bank,
property
if
intangible
purchased
in-
tangible
short-term
disposi-
highly liquid
vestments and
acquisition, management,
assets from
integral
property
which interest
constitute
was derived. This
tion of
specific
was a
Champion.
trade or
parts
function of
money from these
operations;
[Emphasis
short-term investments
added]
*
activity.
needed for future
*
*
*
*
*
was usual
means all
income”
D. “Nonbusiness
practice,
business to follow this
whenever
income;
income other
than business
enough
there was
money
or business
immediately
come
was not
needed in
phrase,
is meant
the italicized
What
the business.
activity in the
*4
“transactions and
Champion contends that the determining
taxpayer’s
of the
trade or busi-
course
is
factor
the nature of
the transaction
ness” This is
terminology.
?
broad
from which the interest
was de-
income
have been
to find a tech-
We
unable
rived,
relationship
Champion’s
and its
to
nical definition
the
“Transac-
phrase.
business. The interest income was
“
derived
something
tion” is defined as
.
.
.
Champion
from
argues
investments.
is
as a:
deal
transacted:
a business
this
is not “business
”
income” because
.
as
“Activity”
is defined
Champion is not
in the
“
investment busi-
per-
.
.
an organizational
.
unit for
ness.
forming
specific
a
its du-
function; also:
” “Regular”
ties or function
.
.
.
.
disagree. Champion’s representative
We
“
steady
is
as
defined
.
.
.
or uniform testified that
customary prac-
a normal and
course,
practice, or
.
occurrence
tice
cap-
was to invest excess
steadily pursued
Synonyms:
....
ital,
purposes,
not needed for business
NORMAL,
TYPICAL,
NATURAL.
Following
short-term securities.
defi-
our
.
.” “Course” is defined as “.
nition, supra,
specific
this was a
function
procedure
accustomed
:
action:
done in
regular
proceeding
poli-
usual method
.
.
.
Therefore, Champion’s
invest-
cy
conducting
manner of
oneself
chosen:
ment income is “business income”.
”
way
acting
.
Champion’s reliance on Western Natural
Webster’s Third New International Dic-
supra,
misplaced.
Gas
is
It
Company,
tionary
2426, 22,
(Unabridged, 1961), at
deals,
recurring,
not with
customary in-
1913, 522.
vestments,
liquidation
but with a one-time
Accordingly, we
phrase
define
sale
taxpayer’s
gas
of all of the
oil
“transactions and activity
leases.
course
taxpayer’s
of the
trade or business”
Sperry
Depart
and Hutchinson Co. v.
in 72-15A-17(A) as:
Revenue,
(Ore.
ment
1974)
P.2d 729
Business
performance
deals and the
of a
interprets
the reach of a statute almost
specific
normal,
function in the
typical,
72-15A-17(A). Oregon
identical to
is a
customary or
policy
accustomed
pro-
party
Compact.
to the Multistate Tax
cedure of
taxpayer’s
trade or busi-
distinguished,
court
(1)
ness.
satisfy
short-term investments held to
Cf. Western Natural
Company
Gas
corporation’s
capital
need for
McDonald,
202 Kan.
(b) Rents Oregon Utah, parties to the Multi- *5 Compact, state Tax reach the same conclu- Champion rented out approximately example sion with this as does Mexi- percent five of its space. total office co. claims that the income derived rent from not “business income” because Nevertheless, we reach our holding was not the business of renting real es favor of the Commissioner reli- without tate. Regulation ance on 17(b) (1). income, supra,
Like “interest” the most (c) Gains reasonable inference to be drawn from the Champion obtained the raw materials for record is that rental of available office its paper prod- manufacture of wood and space customary was a procedure, done in ucts timber on land leased owned or by logs it. Some of its were to tele- sold We find no evidence the record which phone telephone poles. utilities for use as contradicts this inference. Rental income gain logs on the sale of was was, therefore, “business income”. $4,803,652. The tax consultant testified evidence, There was offered in without $1,339,000,000 that since total sales were objection, Regulation I.T. 17(b). Subsec- drop in the four million “is a the bucket”. (1) tion is entitled Rents real and ap- Even “a in the must be drop bucket” tangible personal property, and reads : portioned if it income”. “business however, an ex- Again, Champion claims Rental tangible income from real and emption, it is in the business because not property prop- is business if income selling logs telephone poles. erty respect to in- which the rental normal, pro- sale of was a taxpay- was come received is used in the for the cedure the business of er’s trade or business or is incidental years. 1972 and had been for several thereto and therefore is includable arising The income therefrom “income property Regulation factor under I.T. activity in arising from transactions Example iii Regulation under I.T. taxpayer’s trade course of the 17(b) (1) reads as follows: sup- evidence or business”. Substantial operates ports decision a multistate the Commissioner’s taxpayer clothing was business chain of men’s The tax- stores.
416 T. “net 631(a) gain IRC income” means base
(2) § adjusted as business apportioned to exclude:
correctly
come.
ijs
‡
>]?
‡
prohibit-
amounts that the state is
631(a)
U.S.C.A.
Section
§ 631]
[26
ed from taxing because of the
laws
a tax
Code allows
the Internal Revenue
Constitution of this state or the United
cutting of timber
payer
elect to treat the
[Emphasis
States
added].
exchange, eligible for taxation
as a sale or
agree
631(a) gain
We
does not fit
tim
capital gains rates,
though
at
even
ordinary
into
definitions of income. See
actually
cut has not
ber which has been
1096a; 71
85
Taxation §
Am.Jur.
C.J.S.
sold.
been
2d State and Local Taxation
483. But a
return, Champi-
tax
its 1972 federal
On
power
state
gauge
its
reported
exchange,
as a sale
the fair
by
reference to the income on which
$950,669
market value of
worth of timber
taxpayer
pay
required
a tax to the
during
cut
but which remained un-
constitutionality
United States. The
year.
sold at the end of that
state statutes which refer to the Internal
capital
New Mexico does not afford
Revenue
upheld
Code definitions have been
Therefore,
gains
taxpayers.
treatment
See,
Murphy,
courts.
Garlin v.
Champion deducted the fair market value
Misc.2d
(1966),
N.Y.S.2d 374
unsold
timber from
business income
aff’d 34 N.Y.2d
(b) New Mexico is imposing a tax on an activity. out-of-state This is 631(a) both un- elected to make this § beyond constitutional part gain the taxing au- of its federal taxable income thority of the State. By gain, for 1972. use of this its federal income tax was calculated. Under the disagree.
We gain terms of 72-15A-2(S), the is in- (a) Timber-cutting gain for federal Champion’s cludable in base income for come tax is subject to New Mexico purposes. New Mexico income tax income tax. Section 72-15A-3 of the “Income Tax (b) New Mexico is not an taxing out- Act” says: activity. of-state A tax hereby is imposed specifically New Mexico not taxed upon the net income of . every gain. the It has 631(a) included that foreign corporation engaged in gain apportionable business income in the transaction of business in Champion. income, of From this business this state. New tax a percentage Mexico can like the Sections 72-15A-2(S) and (T)(2) says: parties other states that are to the Multi- Compact. state Tax S. “base income” means part of taxpayer’s income generally defined tax is not particular The levied on the as taxable income and upon activity taxpayer federal of a carried on which the income tax is calculat- within borders of the taxing federal state. ed; and The tax is percentage levied on a of the
417
course”
is to be
taxpayer’s
its
of business
determined
business income
“unitary”
is
or “one
activity.
purpose of
this whether
The
ig-
integral
approach
the tax
of
an
is to make uniform
laws
business”. Such
scheme
Thus,
wording
nores the
I
participating
statute.
states.
join
Judge
do not
Part A of
Sutin’s
decision does not
The Commissioner’s
opinion.
does the
activity. Neither
tax out-of-state
My approach
“regular
meaning
not
to the
of
beyond
statute.
taxation
or
differs
course” of “trade
business”
taxing authority.
the State’s
approach
somewhat
from the
taken
unconstitutionality
Champion’s claim of
Judge
opinion.
B of his
Sutin
Part
activity,
on taxation of out-of-state
based
it
makes
clear that the
evidence
its
of the tax
imposition
claim
acquired
“reg-
contested income was
in the
beyond
authority
taxing
I do
ular course” of
activities.
Mexico,
groundless.
are both
not
other-
contend
understand
(c)
uphold inclusion
unreal-
Courts
wise.
contention is that
gain
"net
income”
ized
within
for
acquired
contested
was not
state taxation.
trade or
course of
business.
position
on state
we take
taxation
takes a
view of
narrow
gain
as
unrealized
declared
federal tax
meaning
It would
of trade
upheld by
the courts. The
able income
meaning
limit the
of trade
or business
in
gain can
included
“net
unrealized
the main
its
business which
as-
purposes. Garlin v.
come” for state tax
“manufacturing
selling
serts is
fin-
Associates,
supra;
Murphy,
Marco
Inc.
products”.
ished
It contends it is not
669,
Comptroller
Treasury, 265 Md.
291
investments,
renting
the business
(1972);
A.2d
Commonwealth v. Elec
489
property
making occasional sales of
333,
Corporation,
trolux
362 Pa.
67 A.2d
poles.
telephone
Support
for use
as
Graves,
(1949);
Co. v.
Ebling
Peters,
view is found in
“The Distinction
App.Div.
aff’d with
N.Y.S.2d
Between Business Income and Nonbusiness
opinion,
out
284 N.Y.
30 N.E.2d
Income”,
Tax Insti-
Center
S.Cal.Law
(1940).
(1973).
tute 251
Affirmed.
urged by Champion is
The narrow view
supported by
wording
It is so
not
of UDITPA.
ordered.
given
written.
Statutes are to be
effect as
85 N.M.
City
Albuquerque,
Keller v.
WOOD,
LOPEZ,
J.,
J„ specially
C.
72-
v.
my
of
It is
UDITPA
not
belief
does
securities held
long-term and short-term
on
require that
income of a
multiform
non-business income
for investment were
business
in
be included
the business income
did not arise from
because the interest
apportioned
from which
state takes
a
transactions in
course of busi-
regular
the
might
presented
share.
best
be
issue
Company
ness.
In
v.
Western Natural Gas
corporation
a
example
the
of
which
McDonald,
liquida-
supra,
income from a
distributes shoes in New
manufactures and
was
gas
tion sale of oil and
leases
nonbusi- Mexico, Texas, and Colorado.
In addition
ness income
was
made
because the sale
not
business,
corporation
to this
the
also makes
regular
Thus,
the
in
of
course
business.
buildings
profit
from1 office
sizable
organization
all income
of a business
not
pur
operates
which it owns
for rental
income”;
“business
income must
business
poses
approach
in New York. One
arise from the
course of business. Mexico could take to the rent
received
determining
Pertinent
in
whether income would be
it was
to ask whether
corporation
apartments.
arises
in
for the
to rent
the
transactions
finding
customary,
On
the rent
business is “the nature of the
that it was
particular
prac-
al income
be
as
transaction” and “former
would
classified
entity.
of
tices”
Western
income from
New Mexico would
which
McDonald, supra.
proportional
Natural Gas
take its
share. This would
Company
pertinent
appear
approach.
Also
Judge
is how
income is used.
be
Sutin’s
Sperry
Department
Judge
Chief
looks instead to
Hutchinson Co. v.
Wood
Revenue,
taxpayer’s busi
supra.
“regular
course”
ness;
corporation regularly rents
since the
Judge
opinion
Sutin’s
reviews the evi-
be
apartments,
same
would
result
supports
dence. That evidence
the Com-
be to deter
My approach
reached.
would
missioner’s
conclusion
interest income
renting of
mine
business of
whether the
investments,
from short-term
income from
“independent”
in
fices New York
renting surplus property, and income from
shoes.
selling
business of
Guidance
sale of
arising
reg-
sought
meaning
“independent”
should
ular course
Thus,
developed
around
the law
which
I concur in the result reached as to these
unitary
concept.
e.g., Com
See
items.
Industries, Inc.,
Pa.
monwealth v. ACF
join
I
part
in that
Judge
opin-
Sutin’s
Keesling
(1970) and
&
LOPEZ, Judge (specially concurring). deciding In (Or.1974). P.2d how terest from investments was to be classi- agree I with Part A of Judge Sutin’s *8 fied, dispute tax- court did not that the opinion and with the conclusion of Part payer’s “customary” practice “regular” (B)(2)(a) that 631(a) gain reported investments, was to make these but rather by the taxpayer properly by taxed relationship examined the of these invest- New agree Mexico. I do not with the rea- ments taxpayer to the that soning employed in B Part of Judge Su- conducted in Oregon. opinion, tin’s nor with the reasoning em- ployed in Judge Chief Wood’s concurring proposition indi- businesses are opinion. My visible, reasons for preferring the hence income, goes beyond them is business far (1969) ). P.2d 486 I think that a seri- position the Bureau in this ous problem presented taken constitutional case, regulations. and in its failure to distinguish between that in- business, come of a originating in the tax- example, hearing below, For at the in re- state, ing and that income which no sponse question to a from the real relationship to that state. representative as what nonbusiness in- was, representative come Judge the Bureau’s stat- correctly Sutin states that we sim- ply ed : cannot tell from the record before us which of the items contested have no con- “Well, you money if took that out and nection with Therefore, New Mexico. al- yachts pur- invested in for an unrelated though my interpretation different pose bought property not related to may disagreement UDITPA lead to in fu- your logging or whatever it cases, ture quarrel I have no with the re- you it, is and derived income then sult today. reached it would be non-business income.” significantly, regula- More the Bureau’s
tions, examples them, illustrating point
indicate that a there comes where the Bureau activity feels is divisible. Thus, in discussing when rental income is Bureau income the uses the fol- P.2d lowing example: GARCIA, Modesto Appellant, “Example (iv): Taxpayer oper- v. grocery ates multistate chain of stores. HEALTH AND SOCIAL SERVICES DE purchases as an investment an office PARTMENT of the State of building surplus state another Mexico, Appellee. New funds building and leases the entire CONSOLIDATED WITH others. The rental net income is not SEALE, Rosemary Appellant, grocery business income of store Therefore,
trade or the net business. HEALTH AND SOCIAL SERVICES DE rental income is nonbusiness income.” PARTMENT Regulation I.T. 17(b)(1). Mexico, Appellee. Finally, proc- issues constitutional of due Nos. 1918. ess play come into when abolition of Appeals Court of unitary the distinction between of New Mexico. and multi- proposed. July 16, form businesses is Those Su- 1975. preme upheld Court cases which have for- Rehearing July 28, Denied 1975. mulary apportionment have done so on the Aug. 27, Certiorari Granted unitary
basis that taxed the business was a Rudolph, of In- State Taxation Unitary terstate Business Business:
Concept
Corporate
Groups,
Affiliated
183-84,
see,
(1970);
25 Tax L.Rev.
e.
g.,
McColgan,
Butler Brothers v.
315 U.S.
(1942). Al-
62 S.Ct.
though I have found Court concept stating multiform cases respected by taxing state authori- must holding; cases are state court so (there ties Management Corpora- see, e.g., Hamilton *9 Commission, 253 Or. Tax tion