*1 (No. 82988.
TEXACO-CITIES COMPANY, SERVICE PIPELINE SAM
Appellant, McGAW, Il- Acting Director of linois Department Revenue, Appellee.
Opinion April Rehearing June denied 1998. filed 1998. *2 JJ„ NICKELS, BILANDIC, J., joined by McMORROW dissenting. O. Marcus, Ryan
Fred James H. M. Jordan Goodman, Horwood, Berk, Chrtd., Marcus & Chicago, Dziak, Houston, David J. Texas, for ap- pellant. Ryan, General,
James E. Attorney of Springfield (Barbara Preiner, General, A. Solicitor and Deborah L. Ahlstrand, Attorney General, Assistant of Chicago, of counsel), for appellee.
CHIEF JUSTICE opinion FREEMAN delivered the of the court: (Texaco-
Plaintiff, Pipeline Texaco-Cities Service Cities), administrative brought an action for review *3 the defendant, circuit court of Cook County against the acting director of the Illinois Department Revenue (Department). sought Texaco-Cities review of the (1) Department’s determination proceeds from the pipeline sale of a and associated assets constituted “busi (Act) (35 ness income” under the Illinois Tax Income Act (West (2) 1994)), ILCS et seq. 5/101 and the income was the apportionable single-factor, under miles” “barrel 304(d)(2) (35 formula the Act ILCS 5/304(d)(2) (West 1994)). The circuit court affirmed the Department’s proceeds classification of the sale busi income, ness with agreed but Texaco-Cities that sale from the had Both improperly apportioned. been parties appealed. appellate The circuit court affirmed the respect court with classification issue. 286 Ill. 529. with App. disagreed 3d The court the apportion- result, reinstated however, and as a determination, ment of the sale apportionment original the Department’s for leave to Texaco-Cities’ proceeds. granted petition We (166 315), appellate 2d now affirm the Ill. R and appeal court.
BACKGROUND Texaco-Cities, with its a Delaware corporation Texas, in in business of Houston, offices is principal petroleum products crude oil and other transporting business, owned part As of its Texaco-Cities pipeline. states, ran pipelines through which several operated During year, Illinois. the 1983 tax Texaco- including major pipeline sold of its assets as- segments Cities contingent estate, including sociated real entire sale, in Prior to the pipelines assets Illinois. pipeline Lockport, Texaco in Il- refinery sold had serviced the linois, Service, Chicago refinery. and the East Cities However, opera- these refineries ceased subsequently tions, idling rendering them of little pipelines operational Thus, value to Texaco-Cities. Texaco-Cities refinery presence sold them to other with a companies Chicago in the area. Texaco realized a $9,987,176. nearly in a sale of The sale resulted 90% miles. pipeline reduction of Texaco-Cities’ total year 1983, return Texaco-Cities On its for the tax the income from the sale as nonbusiness reported Illinois $2,807,995 of the total income, and allocated to in gain, upon the ratio of assets sold based everywhere. remaining to those sold Texaco Cities’ state income, and reported ap- as business 304(d)(2) Act. portioned as such under section tax returns audited Texaco-Cities’ Department and, audit, year for the tax based question deficiency against assessed $208,441. First, reclassified amount of *4 as “busi- pipeline from the sale of the assets gain the subject apportionment, finding ness income” to that the “integral part [Texaco-Cities’] sale constituted an of operations” trade or Department apportioned Then, under the Act. the income,
Texaco-Cities’ base including single-factor sale, the from the 304(d)(2) “barrel miles” formula articulated in section of protest Department’s the Act. Texaco-Citiesfiled a to the presented decision, and case was to an administra- judge. proceeded hearing tive law The matter for a on a stipulation above, of facts set forth and the fol- (1) lowing stipulated issues: whether the from the pipeline sale of income; assets constituted business (2) properly subject apportion- so, if whether it was 304(d)(2) ment under section Act, as “business transportation by pipeline.” income derived from 5/304(d)(2)(West 1994). ILCS proceedings, In the administrative Texaco-Cities disputed proceeds income, sale were business asserting disposing that its not business did consist of large quantities Instead, of its assets. Texaco- extraordinary maintained, Cities the sale was an event more in nature of a cessation than further- ance of business. Texaco-Cities further contended that improperly apportioned had the sale proceeds under the barrel miles formula section 304(d)(2), encompassed only because that section transportation by pipeline.” derived Rather, “from Texaco-Cities claimed that the income have should been apportioned under the standard three-factor formula in (35 57304(a) 304(a) (West 1994)). ILCS judge
The administrative law issued a recommended disposition Depart- upholding the determination disposition accepted by Depart- ment, and the complaint review, ment. In its for administrative renewed its contentions in the administra- argued proceedings, apportion- tive that the also *5 dep- in a resulted miles formula ment under barrel rights process United States under due of its rivation Constitution. and decision a memorandum court issued
The circuit affirming Department’s judgment characterization court However, the income. as business the income of agreed gain improperly with Texaco-Cities it apportioned and that miles formula under the barrel apportioned the three-factor under have been should 304(a). the additional The court made section formula of finding apportionment miles the barrel under deprivation Texaco-Cities’ amount to a formula would rights. process due finding appellate appeal, affirmed the court
On gain However, the court income. that the was business apportionment of the circuit court’s reversed the reinstated the formula and under the three-factor single-factor apportion- Department’s application of the question of declined to reach the ment. The court 304(d)(2) apportionment under whether finding process, to a violation of due amounted by failing raise it had the issue Texaco-Cities waived proceedings. in the instance in the administrative first App. 286 111. 3d 529.
ANALYSIS
as Business Income
I. Classification
challenges
Department’s de-
first
the sale of its
that the
termination
1501(a)(1)of
income. Section
assets constituted business
as:
“business income”
the Act defines
activity
arising
in the
and
“income
from transactions
taxpayer’s
regular
***, trade or
courseofthe
intangibleproperty
tangible
if
incomefrom
includes
the
prop-
management,
disposition
acquisition,
regular
erty
integral parts of the
constitute
(West
5/1501(a)(l)
operations.”35 ILCS
trade or business
1994).
Conversely, “nonbusiness income” is defined as all
income other
than business
income. 35 ILCS
5/1501(a)(13) (West 1994).
general,
nonbusiness
tangible property
income from
is allocated to the state
property
upon
applica
that is the situs of the
based
statutory
tion of
factors.
income,
Business
on the other
apportioned among
hand, is
states based
their re
spective
permit
“contribution to the environment that
corporation
ted the
to earn an income.” 1 Ill. Tax
Reporter, par.
entity
004, at 1473
An
claim
12—
ing that
its income is nonbusiness income bears the
clearly proving
generally
burden of
this fact. See
Corp. Department
Canteen
Revenue,
123 Ill. 2d
*6
(1988);
Realty
106-07
National
& Investment Co. v.
(1986).
App.
Revenue, 144 Ill.
3d 541
The definition of business
in
section
1501(a)(1)
virtually
is
identical to that
established
1(e)
of the Uniform Division of Income for Tax
Purposes
(UDITPA),
Act
from which our act was derived.
subsequently adopted
The UDITPA was
as article IV of
(MTC)(Asarco
Compact
the Multistate Tax
Inc. v. Idaho
State
Comm’n,
307,
Tax
458
n.3,
U.S.
310
73 L. Ed. 2d
(1982)),
787,
n.3,
791
3103,
102 S. Ct.
3106 n.3
and to
language
parallels
the extent the
of our act
that of the
may
policies underlying
MTC, we
examine the
the MTC
arriving
meaning
and the UDITPA in
at the
of our act.
Caterpillar
See
Lenchos,
Tractor Co. v.
102,
84 Ill. 2d
adopting
recognized
121
States
the UDITPA have
1501(a)(1)
language
encompasses
that the
of section
two
determining
disposi
tests for
whether income from the
capital
tion of
assets constitutes business income: the
test,
“transactional”
embodied in the first clause of the
definition,
test,
and the “functional”
contained in the
e.g.,
See,
second clause.
Ross-Araco v. Commonwealth of
Pennsylvania, Board
Revenue,
74,
Finance &
544 Pa.
(1996);
269
(D.C. 1983).
sociates, Inc.,
The parties agree that the resolution of this case turns an interpretation of the latter clause of sec- tion 1501(a)(1), addressed to income from tangible and *7 intangible assets. The conceded that sale of Texaco-Cities’ pipeline did not fall under Thus, transactional test. we focus our analysis upon the second clause of 1501(a)(1), section and the applicability of the functional test.
Texaco-Cities argues that income is business income only if it arises from transactions and activities occur- ring the regular course of a taxpayer’s business. In making argument, interprets merely of the definition as a subset of the
second clause reasons, Thus, clause. it in order to fall under the first clause, “regularly generated asset income must be latter who gain” disposition property “by taxpayers from the of trading integral part of such assets as an emphasize contends that regular of their business.” Texaco-Cities its assets does not fit into this disposition “one-time, extraordinary” gain it was a category because trade or busi- integral part regular rather than an of its operations. ness statute, ascertain construing a this court strives to meaning legisla effect to the intent and give
ture, with an examina properly begins and this effort Advincula v. United statutory language. tion of the (1996). undefined Services, 176 Ill. 2d Each Blood ordinary ascribed its word in the statute must be Canteen, 123 Ill. 2d at meaning. understood popularly a whole The court should evaluate the statute as 105. it, if so that no term is rendered possible, and construe County meaningless. Bonaguro or superfluous Officers (1994). Board, 158 Ill. 2d Electoral the second clause of Initially, agree we cannot 1501(a)(1) of the first clause. simply is subset general language encompass The first clause consists taxpayer’s course of the activity “regular all ing enlarges second clause this defi trade or business.” The long as property, nition to include income constitute management, disposition” “acquisition, regular trade or busi “integral parts regular “in the phrase operations.” predicate ness with in the clause replaced is second course of business” resulting operations,” regular “integral parts Co. v. Kroger See manifestly different definitions. in two 473, 479 Revenue, App. 284 Ill. 3d Department of clause, we the second meaning Turning to to, “of, or relating means “integral” the term note
271 serving to form a whole: essential to completeness: organically joined or linked.” Webster’s Third New (1993). Dictionary International 1173 The term “opera tions” is defined as “b: the whole process planning of for *** and operating a business or other organized unit c: of a phase business or of activity.” Webster’s Third New Dictionary International 1581 Placed in context, their statutory these terms indicate that acquisition, management and disposition of the income- producing property closely must relate to regular trade or whole process of operating its business. Further, view, our the words “acquisition, manage ment, and disposition” suggest elements typically as sociated with the “keeping” corporate property, or, as observed in Kroger, the “conditions of ownership” of corporate property. 284 App. Ill. 3d at Thus, 479. interpreting the second clause whole, as a the sale of property will constitute business income if the property and sale are essential to the taxpayer’s business opera tions.
According to Texaco-Cities, the second clause man- dates the taxpayer “emphasize trading” sold assets as an integral part of its regular business. Accord Phillips Petroleum Co. v. Iowa Department of (Iowa 1994). Revenue Finance, & 511 N.W.2d that, We think had the legislature intended for this sec- tion to be confined taxpayers to routinely who trade as- sets, or to from the sale of inventory, it could have said so. Texaco-Cities’ construction narrowly focuses upon the “regularity” or frequency of the transaction produced Instead, income. the reach of the second clause broader, is much directed towards the use or disposition of the property as an forming integral part of the taxpayer’s Barlow, business. See McVean & Inc. v. New Mexico Bureau Revenue, 88 N.M. (1975) 525, 543 P.2d J., (Lopez, dissenting).
Notwithstanding interpretation, our under the the functional test validity questions statute, cases other relying upon plain language the test. rejected that have jurisdictions consistent with find the functional test be We of the statute. language reading plain above *9 gain all as income test classifies business functional if was asset the asset capital of a disposition from trade or business regular in its by taxpayer “used clause the second previously, As discussed operations.” 1501(a)(1) function of upon the role or focuses of section opera- business being integral regular to property regu- asset in the capital The use of a tions. that asset an renders indisputably or lar trade business opera- business taxpayer’s regular of the integral part tions. comports functional test also of the adoption
The the Act. behind history purpose legislative with the comments directly from adopted The test UDITPA, the enactment predate which underlying the the dis act, “[i]ncome state that our and which in a trade or business used position property meaning includible within is taxpayer Purposes Income for Tax Division of Uniform income.” Mul (1966), in 2 reprinted Act, Comment 7A U.L.A. § (CCH) 8805. par. Tax Guide Income Corporate tistate by regulations promulgated also is supported The test binding upon not which, although Department, to 104-05), are entitled 2d at (Canteen, 123 Ill. us Code 86 Ill. Adm. See deference. substantial (d)(3) particular, 100.3010(a), §§ 100.3010(d)(3) capital as business classifies were taxpayer, which, owned while from assets in its trade or business.” “used statute, we meaning at the arrived Having case, of this to the facts test the functional apply now and conclude that Texaco-Cities has failed in its burden of proving that the from the sale of its pipeline as- sets was nonbusiness income. According to Texaco- Cities’ tax return year for the in question, its business was “pipeline transportation.” pipelines sold were among several that employed Texaco-Cities to transport petroleum and other substances in its regular course of business. There dispute was no they were used for the production of business income. analogize seeks to the facts of this case Pipe Line, Laurel 537 Pa. 642 A.2d involv-
ing a statute nearly
There,
identical
to ours.
the court
adopted the transactional
tests,
functional
but
concluded that proceeds from the sale of an independent
pipeline by a company in the business of transporting
refined petroleum products was nonbusiness income. We
find the facts in that case to
distinguishable
be
from the
facts at bar. The
court
Laurel Pipe Line found that
the sale was a liquidation of a “separate and distinct
aspect” of
business,
Laurel’s
namely, all of its pipeline
operations in a specific geographical region. Laurel Pipe
*10
Line,
213,
Unlike the a sepa- was a cessation of no evidence that this sale was business. portion rate and distinct Téxaco-Cities’ Cf Barlow, Thus, P.2d 489. McVean & 88 N.M. as busi- classified properly from the sale the Act. under subject apportionment ness income to Apportionment II. of whether busi- proceed question
We now to cor- sale of assets was ness income from the argues rectly apportioned. three- general, under the apportioned have been
should 304(a) of the under section encompassed factor formula miles” formula Act, single-factor than the “barrel rather 304(d)(2). in section multistate, unitary income of apportioning state, Illinois uses a within this operating
businesses apportionment.” known as “formula approach formula is the income of business system, Under apportion is to calculated, applied and a formula in activities taxpayer’s the ratio of the upon based sum Co. Utilities everywhere. Citizens Illinois to its activities Revenue, 111 Ill. 2d 32, formula, is the three-factor commonly most known (35 304(a) ILCS the Act section prescribed which is 1994)) 57304(a) (West to that nearly and is verbatim Caterpillar, the MTC. the UDITPA and established 304(a), income business 2d at 121. Under 84 Ill. is, otherwise except as corporation from a multistate multiplying to this state provided, apportioned measures which by a formula payroll, property, activity based this state. sales within general exceptions sets forth
Section 304 companies” “[insurance for apportionment three-factor 57304(b) (West (35 1994)), organiza- “[flinancial ILCS *11 (West 57304(c) (35 1994)), “[tjransporta- ILCS tions” (35 5/304(d) (West 1994)). tion ILCS Business services” categories apportioned using sep- income within these is formulas, arate, to each single-factor particularly suited respective area of business. proceedings, the administrative be ap-
determined Texaco-Cities’ should 304(d)(2). portioned under section That section states in relevant as follows: part
“(d) Transportation services. Business derived furnishing transportation ap- services shall be (1) portioned paragraphs to this in State accordance with (2): * * * (2) transportation Such business income derived from by pipeline apportioned by shall multiply- be to this State fraction, ing by such income the numerator which is person State, the revenue miles of and the person denominator which is the revenue miles 5/304(d) (West 1994). everywhere.” 35 ILCS A “revenue mile” denotes the transportation of one of oil barrel one mile for consideration. ILCS 5/304(d)(2) (West 1994). 304(d)(2) argues section unambig-
uously applies strictly to income
the act
arising from
Thus,
by pipeline.
transporting
from the sale of
its pipeline
apportioned
assets must
the gen-
be
under
304(a).
eral
formula
cognizant
general
We examine this section
rule
taxing
construed,
statutes are to be strictly
language
beyond
their
not
or
enlarged
extended
Canteen,
clear
addition,
Although ap- *12 reading statutory pears persuasive, a close 304(d) expressly renders language it incorrect. Section “[bjusiness furnishing applies to income derived from added.) “Business transportation (Emphasis services.” income,” Act, income only defined includes not or ser- acquired providing day-to-day products trade,” part “ordinary vices that are but also if an integral part from is property, disposition regular operations. 35 ILCS business (West 5/1501(a)(1) 1994). this incorpo- When definition is 304(d) above, into the of section language rated necessarily beyond reach of that section extends services, include transportation to furnishing mere act integral transpor- to the acquired property income Thus, construc- fitting most tation business itself. 304(d) be to all income tion of section would include transportation from the of furnishing earned determined, As consti- previously services. we such within the of business and falls part operations tutes transportation definition of “services.” broad 304(d)’s that, when section Texaco-Cities contends in sections employed is to language compared 304(b) gen- to the 304(c), exceptions the two other formula, it becomes three-factor apportionment eral 304(d) to was intended to be restricted clear that section furnishing Specifically, services. income from the act of 304(d) from furnish- section covers derived while 304(b) services, broadly en- section transportation ing company” an income of insurance “business compasses 304(c) (West (35 5/304(b)(l) 1994)), and section ILCS “[bjusiness organiza- income of financial includes 5/304(c)(l) (West 1994)). (35 ILCS tion” intended that, similarly legislature had the maintains 304(d) trans- all income from the to include for section so The circuit have stated. business, it could portation argument, and concluded persuaded court was provisions adopt insurance financial an “entity” approach apportionment, whereas 304(d) emphasis “activity’ is on an apportion- ment. The appellate statutory language court found the to be ambiguous.
Texaco-Cities’ argument unavailing. is Each of the three sections at pertains issue to different industries unique each; establishes formulas for the terminol- ogy used in one section bearing has no ap- plied in another. Further, where a statutory subsection has only logical one interpretation, there is no reason to resort to other subsections to create ambiguity. See 2A Singer, N. Sutherland Statutory on Construction 47.02 § (5th 1992). ed.
Under the interpretation by advanced Texaco-Cities, entities furnishing transportation services would have apply to one formula to apportion their income from providing services, and another for the remainder of their income from the transportation business. We can conceive of no reason why legislature the would have intended such a result. The aim of an apportionment formula is to divide business among states based upon the taxpayer’s within activity each re- spective state. The one-factor “barrel-miles” formula of 304(d)(2) section was devised specifically to ap- facilitate portionment of income from the pipeline transportation industry; it is the best suited formula for that purpose. See generally 1 J. Hellerstein, Hellerstein & W. State (2d 1993). Taxation, par. 10.01 ed. Requiring the transportation industry to apply two different formulas to apportion income, its business solely based the type of business gain being apportioned, would be arbitrary and absurd.
The validity our construction by is underscored legislative history of the Act and Department’s regulations. The commentary official to section 304 notes
278 rules of sec special apportionment
specifically (d) to cover 304(b), (c), were enacted order tions “insurance “special businesses” of apportionment of persons furnish organizations, financial companies, services, or otherwise.” by pipeline ing transportation these businesses particular formulas for Apportionment Tax Reporter, UDITPA. Ill. were omitted from the 023, 006, 1903, and at at pars. 14— 14— 12— (1987). regulations The at 1912 formula special apportionment similarly characterize furnishing transporta to broadly applicable “persons (1996). Adm. Code 100.3310 tion services.” 86 Ill. § deter- that we reinstate the urges Texaco-Cities also apportionment the trial court by mination 304(d) violation of amounts to a under court rights. appellate process Texaco-Cities’ due deeming it waived question, to consider this refused during the administra- failure to raise it Texaco-Cities’ agree. tive We proceedings. not before placed or defenses general, issues for the not be considered agency will
administrative administrative See 735 ILCS 5/3— review. first time on (West Depart Co. v. 1994); Construction Griffitts It is well- Labor, 76 Ill. 2d ment of validity right question recognized litigant’s Celo act or omission. subject is to waiver of a statute 107, 120 Board, 94 Ill. 2d Control Corp. tex v. Pollution (1942); see 290, 293 381 Ill. (1983); Riggs, Jenisek v. *14 313, 3d Board, App. 216 Ill. Pension Caauwe v. Police (1991). lack agencies that administrative It is true 316 constitutional a statute on authority to invalidate City validity. Moore question to or even grounds of 531, 2d n.5, 52 L. Ed. Cleveland, 431 U.S. 497 East (1977). Nonetheless, it n.5 1934 n.5, 97 S. Ct. challenge on to assert a constitutional is advisable tribunal, because the administrative record before proof administrative review is confined to- the offered agency. practice before the Such a serves the of purpose avoiding piecemeal litigation and, more al importantly, lowing opposing parties a full opportunity present ev idence to refute the challenge. constitutional See In re (1989). Marriage 131 Ill. Rodriguez, 2d then, accordance with these principles, we hold as waived Texaco-Cities’ challenge constitutional to the ap 304(d)(2) plication of section in this case.
We recognize that waiver is an admonition to the parties rather than a limitation on this jurisdic court’s tion, may and that it be relaxed in order to maintain a uniform body precedent, or the interests of where justice require. State, so American Federation County & Municipal Employees, Cook, Council 31 v. County of 145 Ill. However, 2d 475 a review of the record establishes that is not such a case.
CONCLUSION For reasons, the foregoing we affirm judgment appellate court.
Affirmed. BILANDIC, JUSTICE dissenting: I respectfully dissent. The relevant facts are undis- puted. Texaco-Cities a company principally engaged in the business of transporting petroleum products by pipeline. During the year, 1983 tax Texaco-Cities sold major segments of its pipeline assets and associated real estate. The pipelines sold had only serviced re- two fineries and those refineries had ceased operations. As a sale, result of the pipelines retained no Illinois and reduced its total miles nearly 90%. Also as a result sale, Texaco-Cities ceased its business of transporting petroleum products by pipeline in Illinois. These clearly facts demonstrate that this sale was an extraordinary Texaco-Cities, event for *15 in a essentially closing specific down its business plain language Under the of section geographic region. extraordinary sale constitutes gain the from majority’s Even the accepting nonbusiness income. 1501(a)(1) two, encompasses that section conclusion income,” gain the in this for “business alternate tests not constitute business income. case does the gain concedes that the from Department The business income qualify sale of the does not test, the “transactional test.” under the first alternate qualifies that the Rather, gain the contends derived under the “functional test” as business income 1501(a)(1). That clause the second clause of section from from income includes “income provides that business acquisition, if the tangible intangible property disposition the constitute management, property trade or business taxpayer’s regular the integral parts of added.) 571501(a)(1) 35 ILCS operations.” (Emphasis 1994). (West disregards plain language the majority The that the clause to reach the conclusion of this business income. in this case constitutes the sale that, satisfy the functional holds majority The must income, that is sold property the test for business “ in the taxpayer that was ‘used simply property be ” 182 Ill. 2d at operations.’ business regular trade or Investment Co. Realty National & 269, quoting Revenue, 144 Ill. 541, 554 3d Department of App. 1501(a)(1) however, says. not, what section That is 1501(a)(1) plainly requires clause of section second disposition” “acquisition, management, taxpayer’s “integral parts” constitute property business, simply property not “regular” (Emphasis business. regular “used” 1994). 571501(a)(1) (West added.) Thus, not it is 35 ILCS which is in the business the property the use of Rather, the stat- under the statute. determining factor gives ute which rise to the requires disposition integral part taxpayer’s reg- constitute an If operations. legislature ular business had intended to include as income all from the sale any property taxpayer regular “used” business, easily course of its it could have written the say statute to so. The not such legislature chose to use *16 The language. majority’s holding in this case does not interpret statutory language, the it rewrites it. As noted by commentator, one in the criticizing interpretation the UDITPA definition here the adopted majority: ‘integral,’ ‘regular,’ ‘operations’
“The words and must be analyzing taken into account in the existence of business Merely examining income. produced whether an asset taxpayer effectively business income while owned the ignores very important part of the statute. *** test, [E]ven under the so-called functional the disposition integral actual transaction must be an part of taxpayer’s regular the operations. trade-or-business The specifically statute requires ‘acquisition, manage- that the and ment, disposition integral of the asset’ must be an part taxpayer’s of the regular opera- trade-or-business (Emphasis original.) Lisonbee, tions.” D. State of the (1989). Gain, 333, Law of Nonbusiness 7 J. St. Tax. 335-36 A number of jurisdictions decisions from other have interpreted applied the UDITPA definition of busi- ness income in accord with its plain language. The Supreme Court of Pennsylvania reached this conclusion on remarkably Laurel Line similar Pipe Co. v. facts Commonwealth Pennsylvania, 537 Pa. 642 A.2d case, In that Pipe Laurel Line Company (Laurel) inwas the transporting business of petroleum products by pipeline. operated pipeline Laurel from Philadelphia Pittsburgh pipeline another from (the Pennsylvania to Ohio Ohio pipeline). As a result of shifting patterns, distribution Laurel discontinued operation of the Ohio pipeline and later sold the pipeline along with related assets. Laurel classified
$3,766,047 sale of the Ohio gain pipeline from the nonbusiness income. Court, Pennsylvania Supreme applying income, agreed
UDITPA definition of business
Laurel’s
from the sale was nonbusiness
income.
gain
statutory
definition encom-
The court noted
func-
tests,
the transactional
test and the
passed two
did not
concluding
gain
qualify
tional test. After
that the
test,
income under
the transactional
as business
classified
whether
should be
court considered
the functional
test. The court
as business income under
statutory
required
definition
emphasized that
“
disposition
management
‘acquisition,
regu-
integral parts
constitute
property
”
in origi-
operations.’
(Emphasis
lar trade or business
nal.)
Line,
Pa. at
642 A.2d at
Pipe
Laurel
7401(3)(2)(a)(l)(A). The court held
72 Pa. Stat.
quoting
§
definition,
the sale was
that,
under this
income,
that:
reasoning
not business
integral part
disposed
not
of as an
“[T]he
Rather,
the effect
regular
trade or business.
Laurel’s
portion
company liquidated a
of its
the sale was that
*17
proceeds
that
the
of
This is evidenced
the fact
assets.
operations of
not reinvested back into the
the sale were
business,
entirely
were
to the stock-
the
but
distributed
Although Laurel continued to
corporation.
of the
holders
second,
of the
independent
the sale
operate
pipeline,
liquidation
separate
of a
pipeline constituted a
[Ohio]
Line,
Pipe
Laurel
537 Pa.
aspect of its business.”
distinct
211,
at
The court went on to conclude
“partial
liquidation
characterized as a
could be
pipeline
busi-
changed
has
the structure
which
A.2d at 477.
Line,
283 bar, heavily case at on the lower relied Line, court’s in Laurel Pipe arguing decision Likewise, directly point.” case was on the deci- “perhaps judge sion of the administrative law in this case relied Line, on the lower court’s decision in Laurel Pipe concluding that it the “identical situation.” presented
Similar facts were also
in McVean & Bar-
presented
Revenue,
low v. New Mexico Bureau
N.M.
(1975),
P.2d 489
a decision
in Laurel
Pipe
relied
McVean,
Line. In
was in the
taxpayer
business of
laying pipelines
varieties,
of two
diameter
small
large
part
diameter. As
of a corporate reorganization,
taxpayer
liquidated
large
diameter
busi-
ness. The New Mexico Court Appeals, again applying
the UDITPA
income,
definition of business
held that
this gain
properly
classified as nonbusiness income.
In so
holding,
court noted that
the facts indicated
“very
transaction was
unusual”
for the
taxpayer
“changed
the geographical environment of
[the
where
taxpayer’s] business
operate.”
could
The
court further noted that
the taxpayer was not in the
buying
business of
and selling pipeline equipment. court found that
the transaction at
partial
issue was a
liquidation of the taxpayer’s business and a total liquida-
tion of the taxpayer’s
diameter
large
pipeline business.
Accordingly,
sale did not constitute
integral part
an
of the regular
trade or business
operations
taxpayer
and the
derived therefrom was not busi-
McVean,
ness income.
at
N.M.
avoid a hostile takeover. The court
noting
jurisdictions
that a number of
had determined
the
two alternate
statutory language encompassed
tests. Without
whether
the statute
encom-
deciding
to the transac-
passed the functional
test
addition
test,
from
tional
the court determined that
the income
the sale
not constitute
income under ei-
would
business
test,
addressing
Phillips
ther test. In
the functional
Petroleum court reasoned that
this test was intended to
disposal
income derived from the
of fixed as-
encompass
by taxpayers
emphasize
trading
sets
who
of assets
Accordingly,
of
integral part
regular
as an
business.
assets for
taxpayer
disposed
because the
owned the
for
production,
trading
of
not
purposes
petroleum
from the sale of those assets was not
purposes,
gain
Petroleum,
610;
income.
511 N.W.2d at
Phillips
business
Olsen,
Corp.
also
Care
v.
705 S.W.2d
see
General
(Tenn. 1986) (“the
use
the conjunction
646
drafters’
of
as well as
clearly
disposition,
‘and’
indicates
must be an
acquisition
management
property
or
regular
trade
integral part
taxpayer’s
McDonald, Western Natural Gas Co. v.
operations”);
(1968)
company’s
from oil
(gains
Kan.
Accorded its proper construction, would not encompass from the sale at issue in this case. Undeniably, the sale of nearly 90% of Texaco- pipeline assets, Cities’ entailing the complete cessation of its transportation in Illinois, not an “integral part” Texaco-Cities’ “regular trade or business operations.” Texaco-Cities inwas the business *20 transporting petroleum products, not the business of disposing of pipelines. 90% its The facts reveal this sale was an extraordinary event, similar to the partial liquidations identified in Pipe Laurel Line and McVean. Accordingly, plain under the language of sec- tion that sale is nonbusiness income and must be allocated and taxed as such.
I therefore dissent from the majority’s holding the gain from Texaco-Cities’ sale of the pipeline assets constitutes business income.
JUSTICES McMORROW and join NICKELS in this dissent.