*1 Revenues, PLEDGER, Commissioner C. James Administration, Finance and Dep’t of Arkansas State WORKS, INC. TOOL ILLINOIS 812 S.W.2d 90-242 Arkansas Court of 24, 1991 delivered June Opinion *2 Jones, Keadle, Theis, Robert L. Cora E. William John Bobo, Carson, and Beth B. Malcolm Kaufman, David Gentry, Pruett, Kinkead, for appellant. Rick L. Joyce by: Jones, Jack, P.A., G. for Sayre, appellee. Lyon by: Eugene & addresses for the first This tax case Justice. Tom Glaze, on Arkansas’s “unitary effect of the time the Act (UDITPA), for Tax Purposes Division of Income Uniform 723 (1987, Supp. 26-51-701 —to— Code Ann. Ark. §§ corporate Arkansas its governs imposes respective Act how This that have earnings of corporations franchise taxes on designed entities. UDITPA and multinational multistate *3 in which a conducts among corporation the states fairly apportion income fair amount of value or business its multistate business a Generally, activities in each state. earned corporations’ UDITPA, of a corporate net taxable “business income” under in a multistate business is apportioned upon involved taxpayer sales, tangible three factor formula of well-recognized property, and payroll. a multistate and (ITW), Illinois Tool Works
Appellee, multinational a worldwide business in having corporation tools, fasteners, and the manufacturing packaging products in seventeen leasing of ITW has divisions machinery. operating in the United States and conducts business in several places is located foreign manufacturing countries. One of ITW’s plants Bluff, in Its or “commer- headquarters Pine Arkansas. corporate cial domicile” is in Illinois. Chicago, that, for certain capi
ITW determined UDITPA purposes, 1983 from six gains through tal income it had earned income;” was “nonbusiness thus it ex different assets capital calculating cluded this income when its allocation of taxes to this Instead, of these state.1 ITW allocated the income from sale domicile,” in and the Chicago assets to its “commercial capital income tax laws. income was taxed under the Illinois corporate six in two manufactur- ITW’s assets stock capital Japanese conceded UDITPA. We note that there were that income from the sale of originally preferred seven stock assets in was “nonbusiness income” under dispute, but the appellant NIFCO; ing NISCO stock in companies, Computer Prod- ucts, Inc.; real located undeveloped near ITW’s property head- Chicago; U.S. Notes and quarters Treasury foreign currency transactions.
The Arkansas of Finance Ad- appellant, Department ministration, income, disagreed ITW’s classification of this the income constituted asserting “business income” for of Arkansas’s UDITPA. purposes Accordingly, as- appellant $45,164 sessed ITW additional taxes of for the approximately 1981-1983. After an years losing appeal an administrative hearing, ITW additional taxes under paid protest appealed chancery court. court,
The five chancery relying on United States Supreme 1980’s, Court cases decided in the held the “unitary business must be utilized in determining whether or not intangible income of multistate or multinational tax- corporate be payer is to classified as “business income” “nonbusiness income” for UDITPA In applying the in this purposes. principle case, the chancellor further concluded that ITW’s aforemen- tioned income from the sale of its six was capital assets not taxable by the state because the income in no was connected with way ITW’s Arkansas business activities. appellant appeals from the lower holding, court’s arguing that the chancellor misapplied *4 the law made and erroneous of fact. find findings We no error and therefore affirm. UDITPA,
Under the “business is income” defined follows:
Income from arising transactions and activity in course of the regular trade or business taxpayer’s includes tangible income from intangible if property management, and of the acquisition, disposition property regular constitute of the integral parts taxpayer’s trade business operations.
Ark. Code Ann. (a) 26-51-701 As we noted (Supp. § all “business is previously, income” this state apportioned using an established formula. Ark. Code Ann. 26-51-709 § Also, Act, (1987). under the “nonbusiness is defined as income” income,” all income other than (e), “business 26-51-701 § nexus having logical the most to the state specifically allocated income” its (usually the “nonbusiness producing with the asset among than domicile”) being apportioned rather “commercial conducts its business. where the corporation the states mid-1970’s, of the Arkansas the Revenue Division In the certain Finance and Administration adopted of Department tax regulations implement provisions income corporate member of the Multistate Arkansas is a Arkansas’s UDITPA. (and states) it other regulations adopted Tax Compact (MTC). were the Multistate Tax Commission suggested by “full referred to as regulations generally apportion- These because construed the regulations they broadly concept ment” construed the very narrowly concept “business income” and “nonbusiness income” for UDITPA purposes. 207, Ward & v. Qualls Montgomery Company, this court the “full (1979),
After the
the U.S.
Qualls
the “full
rationale
the follow
changed
by adding
apportionment”
ing two
under the Due Process Clause of the
requirements
1)
fourteenth amendment:
a minimal connection or nexus be
state;
2)
tween the interstate activities and the
taxing
rational
between the income attributed to the state
relationship
and the
intrastate values of the
Mobile Oil
enterprise.
Taxes,
Commissioner
139 follows:
(T)he in the linchpin apportionability field state income taxation is the business In accord principle. with show, what principle, (taxpayer) must appellant in order to establish that its dividend income is subject Vermont, to an tax is that the income apportioned was earned in the course of activities unrelated to the sale of state. petroleum products following The cases Mobil all cited the above language and utilized the business Exxon “unitary principle” analysis. Revenue, v. 447 U.S. (1980); Wisconsin 207 Corp. Dept. of ASARCO, Comm’n, v. Inc. Idaho State Tax 307 U.S. (1982); F.W. Woolworth Co. v. Taxation & Revenue Dept., Board, (1982); U.S. 354 Container Franchise Tax rationale, U.S. 159 Under the business” “unitary decisions, in these for expressed general determining test whether a diversified group “unitary businesses had busi ness” was to whether relationship determine the income that the state was from integration, tax resulted functional attempting centralization of management, and economies scale utilized by the corporate group. above,
In to the response Court cases cited Supreme 1984-2, Arkansas Revenue Regulation Department adopted recognized which Court’s due limitation but Supreme process applied “unitary to dividend income. principle” only In this appeal, appellant regulation argue relies on this income, since ITW’s gains were not derived from dividend the income is still taxable. We do not agree the appellant’s reading of these Court limiting cases as the “unitary to dividend income. principle” analysis only ASARCO,
In Court argu- addressed Idaho’s ment that dividend income received by ASARCO should be considered a of a if the “unitary intangible business” property acquired, managed or of for disposed purposes relating or to the contributing business. The taxpayers’ rejected Idaho’s “full and held that apportionment” argument the dividend income of ASARCO was not taxable Idaho. so holding, the Court stated the following: *6 destroy business would of definition
This that it earn requires The business a corporation concept. a return on its and to provide continue operations to money of its in- operations, all capital. Consequently, invested made, said to in some sense can be investment cluding any contributing [corpora- related to or to purposes be “for limit, to its logical When pressed business.” tion’s] no limitation becomes business” “unitary conception at all. limitation dividend concerned the main ASARCO
Although dispute interest income, to tax certain ASARCO Idaho also attempted However, Idaho and from stock sales. gains and capital derived gains interest and agreed ASARCO had that manner as the be treated in the same from these sales should Court concurred with the parties’ dividend income. The Supreme at must look principally that “One agreement, stating to determine not at the form of investment underlying activity, Court then of apportionability.” Supreme the propriety this other income Idaho’s to tax attempt to hold that proceeded violated the due clauses. process also ASARCO, court did not from reading Supreme
Clearly to dividend “unitary principle” apply intend for the the chancellor here was we hold that Accordingly, income only. analysis “unitary correct applying sum, reading of the facts of this case. In we believe the appellant’s narrow, cases much too and those cases Court constitutionality no can be construed to way uphold Regulation 1984-2. appellant’s suggestion
We note the
appellant’s
case,
in its most recent
holding
backed off of its ASARCO
Board,
Tax
Again, disagree reading we appellant’s *7 value” Court case. We do not see how “flow of Supreme in Container benefits the case here. It analysis appellant’s appears be a set in the earlier cases. just rewording to out principles Further, we do not read the as Court’s limiting Container case in To holding ASARCO. ASARCO is cited with contrary, throughout the Container case. approval sum, that, agree
In
we
with the
in complying
chancellor
cases,
holdings
with the
he
foregoing
Court
was
obliged
“unitary
to utilize the
business
in this case.
Those
also
us to
v.
holdings
require
Qualls
overrule
case of
Ward,
207,
Montgomery
(1979),
First, in
applying
business
“unitary
principle,”
chancellor found that ITW’s
income
sale
capital gains
from the
NISCO, NIFCO,
its stock
interest
and CPI was “nonbusiness
income” for Arkansas UDITPA
We
no time
purposes.
agree. At
did ITW hold the
of the stock in these
majority
companies,
boards,
while ITW had two or three directors on the companies’
there is
showing
no
that ITW had a
or
controlling interest
part.
potential
operate a
as
of a
company
“unitary
business” is not
when in fact there is a discrete
dispositive,
F.W. Woolworth Co. v. Taxation & Revenue
enterprise.
Dept.,
companies business.” “unitary of a as a part the chancel Further, also clearly supports the record of U.S. redemption from the gains ITW’s capital finding lor’s transactions, and the install Notes, foreign currency Treasury were not an Chicago land located undeveloped ment sale of busi leasing manufacturing regular of ITW’s integral part Instead, we agree at the Pine Bluff plant. carried on nesses assets as normal or passive of these classification the chancellor’s ARCO, the in AS clearly out so of ITW. As pointed investments to continue that it earn money requires of a corporation but return on its invested capital and to provide its operations not fit the “unitary the business does for money the use of *8 test. business principle” reasons, we affirm the chancellor’s foregoing
For the the “unitary of law applying of fact and conclusions findings conclusion, we the facts of this case. to business the chancellor erred ITW’s argument mention briefly unable to fees. We are attorneys’ simply its for denying request cross to file a notice of a this issue because ITW failed reach See 3(d). Independence under ARAP Rule as appeal required Davis, 387, 646 S.W.2d 336 Fed’l S&L Ass’n v. Affirmed.
Hays, J., dissents. Hays, Justice, disagree I dissenting. respectfully Steele to in an area judgment I believe it has rushed majority, as state, at the our and is that will have substantial impact upon all, and, See P. time, above abstruse. same transitional complex, Hartman, Taxation on State and Local Federal Limitations § 9:30 (Supp. work on begun
While States Court has Supreme the United discussed, the majority as the unitary principle, much generated has and of that application impact principle just As evidenced litigation by and little Id. at 396. very harmony. issue, answers are of the discussion of this complexities few have been provided ascertainable and easily Hartman, on See P. Federal Limitations e.g., decisions. (1981 1990); State and Local Taxation J. Supp. § Hellerstein, Taxation, State Income and Franchise Corporate (1983 Taxes 8 and 9 1989); Constitutional Law 96 Supp. §§ L. (1982); Harv. Rev. 62 C. The Unitary Business inState Floyd, Court?, Taxation: at the Y. 1982 B. U. L. Confusion 465. Rev. It has even been suggested that because of its complexi- ties, the issue is one the courts are not to handle: equipped
Given the within which court must operate, limitations it is entirely that it would be for possible infeasible court to examine all of the of intricacies the unitary formula in order apportionment to determine whether a business is fairly subjected to taxation aby standardized formula. apportionment Fair divers apportionment kinds business in- formula of of volves a knowledge substantial a operations great of of taxed, variety industries that are as well as technical problems Courts are accounting. hardly equipped satisfactorily problems. handle such Perhaps com- plexities broad problem legislative some suggest guidance, to the states and the taxpayers, fair solution. emphasis.] [Our Hartman, Taxation, P. Federal Limitations Local on State and 9:29 (1981). § mind, decide,
With that I think it as the improvident does, the majority of a Su constitutionality question *9 on, yet Court itself has and which stands preme passed not still as good law. The argument presented the state in this case is by closely related to the Qualls issue Montgomery, 207, 585 S.W.2d (1979), 18 and not yet by has been addressed the Court, overruled, United States Supreme much less as pro nounced the by majority.
In we Qualls, addressed the of interest from loans question made to by Ward relative subsidiaries and corporations and and, hence, whether that should as “business income” qualify Our the apportionable. current statute same definition provides relevant in Qualls-. (a)
26-51-701 “Business income” means income arising of the activity regular transactions and in the course from and trade business and includes income taxpayer’s or man- acquisition, if the intangible and property tangible integral of the constitue property and agement disposition regular trade or taxpayer’s of the parts operations. income, not, as the the interest was
We that held states, but commingled, funds were because simply majority in the course “regular transactions the loans constituted because business,” statutory definition. pursuant of Ward’s rela- Ward’s contention that corporate We addressed business, and responded, of a part unitary were tives if not be answered the income essence, that need question in the course regular that were came from activities Or, terms the business. it in United put trade or taxpayer’s fact that the loan would now employ, States business, was regular were of Ward’s course transactions part unitary find of a part sufficient to these transactions is what the state is here—that essentially arguing business. This of ITW’s trade or business part the investment income make ITW’s part regular because the investment activities up trade and business. by in those cases cited Court’s discussions unity involved whether there was between only
majority
and the income source on
basis
the extent
taxpayer
and the
of interconnectedness of the taxpayer
questioned
quality
did not
of an income
The court
address the
operation.
question
business,
on the
solely
source
of the
being part
taxpayer’s unitary
of an
as was the
regularity
activity,
basis of the
frequency
state,
here,
argued
situation in
as
Qualls,
specifically
business.
of its
regular
integral
investments were
part
or the
Qualls
This
is not novel
either
approach
Hartman,
fact,
out
P.
Federal
appellant.
pointed
on
9:30 at 437-439
Limitations
State
Local Taxation §
Comm’n,
1990), in
Tax
(Supp.
AS ARCO v. Idaho State
(1982),
U.S.
cited
ASARCO’s own counsel
by majority,
case,
be
agreed that while not
in its
investments could
an
present
business,”
“adjunct to the
own
actual conduct of
taxpayer’s
business, and
and could be
to be
of a unitary
found
Court has
And while the
States
*10
apportionable.
United
not
courts have and the
addressed this
several lower
question,
e.g.,
is to
in those cases. See
inclination
allow apportionment
145
Tax.,
(N.J.
Bendix
v. Director
Corp.
Div.
The other
factor which the
fails to
important
majority
mention is the burden of
cases. It
proof
these
is not incumbent
the state to show sufficient
between
upon
nexus
the apportioned
Rather,
income and the
there is no
but
taxpayer.
question
on
burden is
The state’s
is of
taxpayer.
taxation
course
constitutional,
Perroni,
227,
Fisher v.
299 Ark.
presumptively
96,
Hill,
(1989);
There was as noted to show by a lack majority, of interconnectedness between ITW and or the companies invested, sources in which it had did that is to ITW not a say, have share interest, in its and had had majority holdings controlling no no common officers or and did not employees provide any administrative services to the companies.
While this may have been clear and may cogent interconnectedness, evidence such a is not finding controlling Rather, here. we look at the evidence of the light state’s argument that investing was regular the business so as to part make the investing operations part of ITW’s business. There is no discussion of such in either the evidence appellee’s brief or the majority opinion, yet glance a mere at the record substantiates the state’s claim. The critical evidence most on given treasurer, point was ITW’s vice president David Smith, Byron who testified that all management invest- office; ments was it through significant handled his that was a of the treasurer’s an he would hour or so operations; spend investments, each working on and that such day investments *11 146 He further testified the priorities company. four
one working capital, was used as from investments received money but investment was used for working purposes, this In the on face ultimately point. inconclusive testimony was least, clear, that ITW has failed to is to me at testimony, it burden. its meet of the States the direction United
As unsettled, join I cannot reaching, far consequences and the area, where the record has in this particularly, venture majority’s the appellee’s on this sufficiently developed question been lacking. was consequently of proof burden v. T. GATLIN Gary G. GATLIN Angela S.W.2d 91-133 Court of Arkansas 24, delivered June Opinion