Appendix — ASARCO, Inc. v. Montana Department of Revenue

Supreme Court brief1978

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Text

Supreme Court, U. .

FILED ©

NOV 7 1977

| MICHAEL RODAK, JR., CLERK

IN THE

— Court of the United States

OcToBEeR TERM, 1977

No. 77 265 8

ASARCO IN cORrORATED (formerly The American

Smelting and Refining Company), Appellant,

MontTANA DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA, Appellee.

On Appeai from the

Supreme Court of Montana

C. RupotF PRrrRSON

GrOROR W. BRATTY

ALAN T. CATHCART

1200-18th Street, N. W.

Washington, D.C. 20036

Counsel for Appellant

Passs or Bron 8. Aa PRINTING, Inc., WasHINoTON, D. C.

—

APPENDICES

INDEX

Page

ArrRNDIX A:

Opinion of the Supreme Court of Montana la

Order of the Supreme Court of Montana Denying

Appellant’s Motion for Rehearing .......... 18a

Findings, Opinion, Conclusions of Law and Judg-

ment of the State District Court ............ 19a

Findings, Conclusions of Law and Order of the

rr 39a

ArrEN DR B:

Final Judgment Entered by the State Distriet

Court on August 18, 1977ũT7ʒ7/77ʒ777 . 46a

Aprenpix C:

Notice of Appeal filed in the State District Court

e . cbinin 48a

Notice of Appeal filed in the Supreme Court of

Montana on October 6, 1977ĩ ũ ꝶ·)i 49a

Arr xxo D:

Section 84-1503, Revised Code of Montana 1947 .. 5la

Chapter 10 of Montana Corporation License Tax

tions as Adopted mber 30, 1966 .. 5la

ArrENDRN E:

Extracts from the Brief of the Department in the

Supreme Court of Montana ................ 59a

Arr rom F:

Protest of Proposed Deficiency Assessments filed

by Appellant with the Department .......... 64a

ii Index Continued

Page

Appenpix G:

Extracts from Appellant’s Petition for Rehearing

in the Suvreme Court of Montana .......... fla

Appenpix H:

Extracts from the Department’s Response to

Appellant’s Petition for Rehearing in the

Supreme Court of Montana ................ 78a

APPENDIX A

No. 13249

IN THE SUPREME COURT OF THE STATE OF MONTANA

1977

Montana DeparTMeNT oF Revenve, State or Montana,

Petitioner and Appellant,

— vs —

TRE American SMELTING AND Rerininc Company,

Defendant and Respondent.

Appeal from: District Court of the First Judicial Dis-

trict, Honorable Peter Meloy, Judge pre-

siding.

Counsel of Record:

For Appellant:

Terry B. Cosgrove argued, Helena, Montana

Theodore W. DeLooze argued, Salem, Oregon

For Respondent:

Hughes, Bennett and Cain, Helena, Montana

George T. Bennett argued, Helena, Montana

Charles Smith, Helena, Montana

For Amicus Curiae:

William D. Dexter appeared, Olympia, Washington

Submitted: January 27, 1977

Decided July 11, 1977

Filed: July 11, 1977

/s/ Tuomas J. Kearney

Thomas J. Kearney

Clerk

Mr. Chief Justice Paul G. Hatfield delivered the Opinion

of the Court.

This is an appeal by the Montana Department of

Revenue (DOR) from a judgment entered in the district

court, Lewis and Clark County, affirming a final decision

of the State Tax Appeal Board (STAB). The STAB

decision ordered a recomputation of the deficiency as-

sessment levied by DOR against American Smelting and

Refining Company (ASARCO).

In 1972 the auditors of the Multistate Tax Commission

conducted an audit of ASARCO’s records for the tax

years 1967-1970. Subsequent to this audit, additional cor-

poration license taxes were assessed against ASARCO

by DOR. The amount of this deficiency assessment is the

underlying issue upon appeai.

ASARCO is a New Jersey corporation engaged in na-

tional and international operations in the business of min-

ing, smelting, refining, manufacturing, buying and selling

nonferrous metals and minerals. ASARCO basically en-

gages in two separate, but related areas of operation. The

first is a primary metal operation consisting of the mining,

milling, smelting and refining of nonferrous metals. The

second is a nonferrous alloy operation consisting of the

manufacture and sale of alloy products.

For the tax years in question ASARCO owned mines

in Colorado, Washington, Arizona, New Mexico and Ida-

ho in addition to mines in Canada and other foreign

countries. It operated smelters and refineries in Texas,

Maryland, Colorado, Montana, Missouri, Arizona, Ne-

braska, New Jersey, Washington and California for the

years in question. Alloy manufacturing plants were lo-

cated in Texas, New Jersey, California, Oklahoma and

Indiana. ASARCO sales offices were located in New York,

Baltimore, Boston, Cincinnati, Cleveland, Detroit, Mil-

waukee, Philadelphia, Rochester and St. Louis.

ASARCO owns and operates a smelter in East Helena

which is its principal operation in Montana. This smelter

receives lead ores and concentrates from company mines

as well as unrelated suppliers. The smelted, but unrefined

lead product is then shipped to other units of ASARCO

for further treatment and eventual sale. Anaconda Com-

pany purchased various by-products of the East Helena

smelter for the years in question. In addition to the East

Helena smelter ASARCO owns certain active and inac-

tive mining properties in Montana.

Prior to 1962 ASARCO reported its income from its

Montana properties by separate accounting, pursuant to

section 84-1503, R.C.M. 1947. Under that method ASARCO

determined the gross receipts from its Montana proper-

ties and deducted all expenses incurred by or attributable

to such properties to arrive at Montana income. Where

overhead expenses such as the cost of transportation were

attributable to more than one state, they were appor-

tioned to determine the Montana portion.

In 1962 ASARCO recognized that its business was uni-

tary in nature and it could no longer use separate ac-

counting for its income. Pursuant to section 84-1503 it

requested permission from DOR to change from separate

accounting to the unitary method of accounting. Permis-

sion was granted by DOR and a ‘‘hybrid’’ system of re-

porting income was institu‘ed. Under this hybrid sys-

tem, all but a negligible amount of total company income

from rents, royalties, dividends, interest and sales of

tangible and intangible properties was allocated to sources

outside Montana. After deductions for the allocated in-

come, ASARCO’s operating net income was apportioned

to Montana sources by the use of a three factor formula.

An in-depth examination of ASARCO’s hybrid system

indicates the following procedure was used to compute

tax liability for the years in question. ASARCO classi-

fied the income listed below as nonbusiness income under

DOR’s 1967 regulations, deducted it from its apportion-

able income, and allocated it as indicated:

(a) Income from mine royalties paid by the lessees of

ASARCO’s Keystone Mine previously operated by

ASARCO and located in the State of Colorado was al-

located to the State of Colorado;

(b) Income from patents and copyrights on items de-

veloped by ASARCO’s research department and used

in ASARCO’s operations and licensed to others, was al-

located to commercial domicile;

properties and rented to employes was allocated to the

state where such rental units are located:

(d) Interest income from United States obligations,

customers notes and bonds, notes on the sale of a plant

and General Cable stock, from state and municipal bonds,

time certificates, bankers acceptances, and commercial

paper was allocated to the state of commercial domicile;

(e) Gains from the sales of tangible properties were

allocated to the state of sale;

(f) Dividends paid on stocks were allocated to state of

commercial domicile;

(g) Gains from the sale of stock were allocated to the

state of commercial domicile; and

(h) Income from securities deposited with Montana

state agencies and from money deposited in Montana was

allocated to Montana.

The percentage of apportionable income or loss at-

tributable to Montana sources was calculated by the use

of this formula:

Montana property + Montana Payroll + Montana Sales

Total ASARCO Total ASARCO Total ASARCO

Property Payroll Sales

=__%

Averaged by dividing by 3

The percentage obtained was then multiplied by

ASARCO’s total apportionable income to determine the

Montana contribution.

DOR contends the hybrid system used by ASARCO

to calculate its Montara income incorrectly interpreted

section 84-1503, R.C.M. 1947. That section at the time in

question, stated:

If the income of any corporation from sources with-

in the state cannot be properly segregated from in-

come without the state, then, in that event, the

amount of the net income returned shall be that pro-

portion of the taxpayer’s total net income which the

taxpayer’s gross business done in the state of Mon-

tana bears to the total gross business of the tax-

payer, and apportionment shall be made under the

rules and regulations prescribed by the state board

of equalization, giving consideration to sales, property

and payroll and such other factors as may be deemed

applicable; provided, however, that the state board

of equalization shall, upon the presentation of satis-

factory evidence, determine that the income from

sources within the state of Montana may be properly

segregated from income from sources without the

state of Montana and shall allow separate account-

ing. The board shall publish not less than once a

year, all rules and regulations pertaining to this

section. All decisions by the board under this sec-

tion shall be subject to judicial review in an action

prosecuted by the corporation in the district court

of Lewis and Clark county. The taxpayer cannot

change from one method of accunnting to another

method of accounting without urst obtaining per-

mission from the board.“

DOR interprets the above statute as creating only two

methods of deter ining income from sources within Mon-

tana—separate accounting or apportionment of total net

income. Separate accounting is available only if income

from sources within the state may be segregated from

sources without the state. In the absence of the above

conditions, total business net income must be apportioned.

DOR determined that the income classified by ASARCO

as nonbusiness income was, in fact, business income as

defined by DOR’s 1967 regulations. DOR therefore re-

stored this income to apportionable net income. In addi-

tion, DOR included in apportionable net income the net

income of six of ASARCO’s wholly owned subsidiaries.

DOR contends that ASARCO and the six subsidiary cor-

porations were engaged in a unitary business and there-

fore the combination was merely an extension of the ap-

portionment method of taxation dictated by section 84-

1503.

Pursuant to DOR’s calculations of ASARCO’s Mon-

tana income additional corporate license taxes were as-

sessed. Protest was made by ASARCO and a hearing was

held before the director of DOR. The director’s decision

affirmed the deficiency assessment. Thereafter ASARCO

appealed to STAB which reversed the director’s decision.

DOR then petitioned the district court, Lewis and Clark

County, requesting a review of the STAB order. On De-

cember 17, 1975, the district court entered judgment

affirming the decision of STAB. DOR appeals the dis-

trict court judgment.

Three issues are before the Court upon appeal:

1) Whether DOR had the authority, pursuant to sec-

tions 84-1503 and 84-1508, R.C.M. 1947, to adopt its

Regulations 1001-1020 (Chapter 10) concerning rules for

the apportionment of corporate net income?

2) Whether ASARCO was correct in its deduction

of alleged nonbusiness income from apportionable net in-

come prior to apportionment?

—— —

o-~ —äb᷑ ¶ R —äz— eG — — tae ee — — — —ml̃⁊p — vw

3) Whether the income from six of ASARCO’s wholly

owned subsidiaries was properly included in apportionable

net income?

On December 30, 1966, DOR adopted its Regulations

1001-1020 (Chapter 10). These regulations were effective

with respect to tax years beginning on and after January

1, 1967. Included within these regulations are specific

rules for allocation and apportionment of corporate income

derived from sources both within and without Montana.

In addition key terms are specifically defined as to their

application to the regulations.

The regulations provide for two methods of accounting

for income; apportionment according to a three-factor

formula and separate accounting. Separate accounting is

allowed only in situations where income can be specifically

segregated as to source. Apportionment of income must

be used in all other cases. The apportionment system

adopts what may be categorized as a ‘‘business vs. non-

business test in regard to determining what income is

apportioned and what income may be allocated to source.

Under this system all business income is apportioned by

use of the three-factor formula while only nonbusiness

income may be allocated to source. Business income is

defined as all income arising from transactions and ac-

tivity in the regular course of the taxpayer’s trade or

business and includes income from tangible and intangi-

ble property if the acquisition, management and dispo-

sition of the property constitute integral parts of the

taxpayer’s regular trade or business operations. Non-

business income is defined as all income other than busi-

ness income.

ASARCO urges these regulations were ineffective as ap-

plied to it for the tax years 1967-1970 for two reasons:

1. DOR by virtue of section 84-1503 had the authority

to adopt rules and regulations only as to the apportion-

ment of such income as could not be segregated as to

source.

2. The regulations adopt a ‘‘business vs. nonbusiness”’

income test rather than the ‘‘source’’ of income test

found in section 84-1503 and are therefore fatally incon-

sistent.

Any contention that DOR lacks the authority to adopt

rules and regulations interpreting taxation statutes is

without merit. In regard to the statute in question, the

power to adopt rules and regulations is clearly and un-

ambiguously stated within the text of the statute. Fur-

thermore section 84-1508, R.C.M. 1947, gives DOR power to

provide ‘‘such other regulations as may from time to

time be found necessary.’’ We affirmed this principle in

State ex rel. Fulton v. District Court, 139 Mont. 573, 366

P.2d 435.

The crux of this entire case is the interpretation of sec-

tion 84-1503 and DOR Regulations 1001-1020. There is

no merit in ASARCO “, contention that DOR has only

authority to adopt rules and regulations for the appor-

tionment of income incapable of segregation as to source.

The function of the Supreme Court when construing

a statute is simply to ascertain and declare what is in

substance stated therein, and not to insert what has been

omitted or to omit what has been inserted. Dunphy v.

Anaconda Co., 151 Mont. 76, 438 P.2d 660; In re Trans-

portation of School Children, 47 Mont. 618, 161 P.2d

901; Section 93-401-15, R.C.M. 1947. The fundamental

rule of statutory construction is that the intent of the

legislature controls. Matter of Senate Bill No. 23, Chap-

ter 491, Montana Session Laws of 1973, 168 Mont. 102,

540 P.2d 975, 32 St. Rep. 954; Hammill v. Young, 168

Mont. 81, 540 P.2d 971, 32 St.Rep. 935; Dunphy v. Ana-

conda Co., supra; Section 93-401-16, R.C.M. 1947. Where

the intent of the legislature can be determined from the

—

plain meaning of the words used, the courts may not go

further and apply any other means of interpretation.

State ex rel. Huffman v. District Court, 154 Mont. 201,

461 P.2d 847; Dunphy v. Anaconda Co., supra. Here,

the plain meaning of the words used by the legislature

unmistakably discloses its intent. DOR clearly has the

authority to adopt rules and regulations as to the ap-

portionment of corporate income without regard to source.

There also is no merit in ASARCO’s second conten-

tion. ASARCO argues that section 84-1503 contains a

source of income“ test to be used in determining appor-

tionable income vs. allocatable income. ASARCO con-

cludes that this apparent conflict with the business vs.

nonbusiness income test found in the regulations makes

the regulations ineffective as applied to ASARCO. As

support for its theory of inconsistency between the stat-

ute and the regulations, ASARCO points out that section

84-1503 was amended in 1974, and the amended statute

conforms to the regulations.

In the construction of an amendatory act it will be

presumed that the legislature, in passing it, intended to

make some change in the existing law, and therefore the

Court should endeavor to give effect to the amendment.

Pilgeram v. Hass et al., 118 Mont. 431, 167 P.2d 339;

Nichols v. School District No. 3, 87 Mont. 181, 287 P.624.

However, this presumption of change is not conclusive.

This Court stated in School District No. 12 v. Pondera

County, 89 Mont. 342, 297 P. 498, that a change in a

statute may be made merely to express more clearly the

original intent of the legislature. Such is the case here.

The unamended statute is not a model of clear draft-

manship in regard to guidelines for the apportionment of

corporate income. DOR therefore adopted Regulations

1001-1020 to provide clear guidelines for taxpayer com-

pliance. The legislature thereafter saw fit to clarify the

section by the 1974 amendment to section 84-1503. The

10a

unamended version of section 84-1503 is not in conflict

with the regulations and therefore ASARCO must re-

port its income in compliance with those regulations.

Regarding ASARCO’s second issue, we find the hy-

brid system of reporting income used by ASARCO to

be invalid under section 84-1503. As above, the crux of

this issue is the interpretation of section 84-1503 and

Regulations 1001-1020. The intent of the legislature in

regard to the determination of what income is appor-

tionable income is clear and unambiguous. Section 84-

1503 provides for two methods of accounting for income;

separate accounting and apportionment.

Section 84-1503 provides a test for the determination

of the correct method of accounting to be used by a

corporation in reporting its Montana corporation license

tax. If income from all sources within Montana can ‘‘be

properly segregated from income without the state’’ then

and only then, may the separate accounting method be

used. Furthermore if the separate accounting method is

applicable, total net income must be allocated to source

rather than the hybrid system used by ASARCO.

ASARCO recognized its business was unitary in na-

ture in 1962. It requested and was granted permission

by DOR to discontinue the separate accounting system

then in use. Hence both parties agree that ASARCO must

apportion its income and the question becomes what

income is included in apportionable net income.

The regulations are clear and simple. All business in-

come is apportionable and nonbusiness income is allocated

to source. ASARCO argues that certain items of income

listed above are nonbusiness income and therefore prop-

erly deductible from apportionable net income. This con-

tention is incorrect.

The regulations state that business income includes in-

come derived from tangible and intangible property if the

lla

acquisition, management, and disposition of the property

constitute integral parts of the taxpayer’s regular trade

or business operation. After an in-depth examination of

the income in question, we find this income is derived

from sources that are integral portions of its business.

This finding is in direct conflict with the district court’s

finding of fact which state this income is nonbusiness in-

come. The test of whether this income is in reality busi-

ness or nonbusiness income is a matter of statutory in-

terpretation. We feel therefore that the finding of the

district court is in error. We are confronted herein with

a conclusion of law, rather than a finding of fact. Listed

below are examples of the relationship of this alleged

nonbusiness income to ASARCO.

1) Royalty Ineome—The royalty income arose from

two sources, mine royalties and patent royalties. The

mine royalties arose when ASARCO leased its Keystone

mine in Colorado to an unrelated mining concern.

ASARCO had operated this mine prior to the leasing.

The royalty was computed on the basis of mine produc-

tion. The patent income arose from royalties paid for

the use of devices developed by ASARCO’s research de-

partment. These devices were developed initially for

ASARCO’s use in its various plants and mines. The main

item included herein was a vertical feed furnace.

2) Rental Income. The majority of this income is de-

rived from homesites rented to employees working near

ASARCO mines and plants. Mr. Pecca, an ASARCO

official, testified at the DOR hearing:

„This is the, it’s almost exclusively rents received

from employees working at the company mines which

are located in remote areas and the company is re-

quired to provide houses.

3) Interest Income—The interest income arose from

customers’ notes on bonds, U.S. government notes, notes

12a

taken on the sale of a plant and stock, state and munici-

pal bonds, and time certificates and other commercial

paper. All were clearly liquid securities and were there-

fore readily available for use in meeting company obli-

gations and debts.

4) Gains on the Sale of Stock—ASARCO bought and

sold stock in various corporations during the years in

question. Included within the sales were stock of General

Cable, Revere Copper, Kennicott Copper, and Hecla

Mining Company. These corporations are all engaged in

the business of either producing metal ore or manufactur-

ing the refined product into goods. The stock was used by

ASARCO for business purposes, such as gaining access

to raw materials or access to potential customers for its

refined metals. Therefore all the above income was gen-

erated by the unitary business operation of ASARCO.

The concept of including income from the sale of tangi-

ble and intangible property and income derived from

rents, royalties and interest within apportionable net

income is not new nor unique. In Sperry and Hutchinson

Co. v. Department of Revenue, 270 Or. 329, 527 P.2d 729,

731, short term securities held to satisfy the need for

liquid capital were held to be apportionable. The Oregon

court stated:

‘“*S & H argues that because this income is the re-

turn on an intangible it must be allocated to/legal

situs. Nothing in our former law requires such an

arbitrary result and our current law expressly pro-

hibits it.“ 527 P.2d 731.

The current law referred to by the Oregon court is in

pertinent part identical to the DOR regulations here in

question. A similar result dealing with short term in-

tangibles was reached in Montgomery Ward & Co., Inc.

v. Comm. of Taxation, 276 Minn. 479, 151 N.W.2d 294.

13a

In Cleveland-Cliffs Iron Co. v. Michigan Corporation

and Securities Commission, 351 Mich. 652, 88 N. W. 2d

564, 572, the issue was whether an investment portfolio

containing certain steel stocks should be included in de-

termining the book net worth of the corporation. The

court held the stocks were closely related to the com-

pany’s business, quoting with approval from Flint v.

Stone Tracy Company, 220 U.S. 107, 31 S.Ct. 342, 55 L.Ed.

389:

Nor can it be justly said that investments have no

real relation to the business transacted by a corpora-

tion. The possession of large assets is a business

advantage of great value; it may give credit which

will result in more economical business methods; it

may give a standing which shall facilitate purchases;

it may enable the corporation to enlarge the field

of its activities and in many ways give it business

standing and prestige.’’ 88 N.W.2d 572.

See also: Great Lakes Pipe Line Co. v. Commissioner

of Taxation, 272 Minn. 403, 138 N.W.2d 612.

Concerning the final issue, DOR is correct in its con-

tention that net income and apportionment factors of six

of ASARCO’s wholly owned subsidiaries must be in-

cluded in ASARCO’s computation of apportionable net

income. This is merely an extension of the unitary method

of taxation. Simply stated, the traditional concept of a

combination of various units of a corporation for unitary

method tax computation is extended to a combination of

various related or affiliated corporations.

In the instant case, the six affiliated corporations are

clearly separate and distinct from ASARCO. However

all are wholly owned by ASARCO and share common

members of their respective boards of directors with

ASARCO. A close relationship exists between ASARCO’s

business operation and the subsidiaries in that the sub-

l4a

sidiaries all provide ASARCO with material, services,

or a market for its products. From the discussion of the

individual corporation’s operations listed below, it is

clear the corporations are dependent upon each other and

each in turn contributes to the other’s business success.

1) Federated Metals of Canada—Federated Metals is

a Canadian corporation which basically operates the same

business in Canada as ASARCO’s American operation.

ASARCO provides Federated with certain central serv-

ices such as operations technology and accounting and

financial services. In addition, sales between the two

corporations are significant.

2) ASARCO Mercantile Company—ASARCO Mercan-

tile is engaged solely in the purchase and sale of ma-

chinery for ASARCO’s subsidiaries. All central services

are provided by ASARCO.

3) Enthone, Inc_—Enthone is a Connecticut corporation

engaged in the manufacture and sale of metal finishing

chemicals and supplies used in metal plating. About 16%

of Enthone’s raw materials were purchased from

ASARCO. Central services were provided by ASARCO.

4) International Metal Company—This company is

ASARCO’s exclusive sales outlet for materials delivered

to foreign countries. ASARCO provides all central serv-

ices.

5) Lone Star Lead Construction Co.—Lone Star is a

Texas corporation engaged in lining tanks with lead for

protection against corrosive contents. The vast majority

of its lead requirements are purchased from ASARCO.

15a

6) Northern Peru Mining Co.— All production from

Northern Peru's mines are sold to ASARCO and re-

fined in its plants.

In addition to the foregoing, Mr. Pecca testified as to

other services provided by ASARCO to all its subsidi-

aries. These include:

1. ASARCO handles central insurance of the subsidi-

aries.

2. Services provided by ASARCO are billed to the

subsidiaries, including top management.

3. All United States and state returns are prepared

by ASARCO for the subsidiaries.

4. Legal services are provided by ASARCO for the

subsidiaries whenever necessary.

5. Essential capital is provided for the subsidiaries,

who do not go to outside sources without first going to

ASARCO.

Coca Cola Company v. Department of Revenue, 271

Or. 517, 533 P.2d 788, 790, 792, is on all fours with the

instant case. There the Oregon court said:

The principal issue in this case is whether the in-

come from Coca Cola and its wholly owned subsidi-

aries may be combined and the apportionment form-

ula applied to the sum to determine the income prop-

erly attributable to Oregon.’’ 533 P.2d 790.

The Oregon court first stated that in order to properly

combine the incomes of the parent and subsidiary, the

business operation must be unitary. The unitary test was

defined as whether the business units, or in this case

corporations, are dependent upon each other and con-

tribute to the operation of the other’s business. Zale-

Salem, Inc. v. Tax Com., 237 Or. 261, 391 P.2d 601. Un-

— — —

16 17a

questionably this test is met in the instant case. The enter judgment in favor of the Montana Department of

Oregon court in Coca Cola Company then stated: | Revenue in the amount of the original deficiency assess-

‘‘We must now decide whether the fact that Coca — /s/ [illegible]

Cola and its wholly owned subsidiaries are organized 4 r *

as separate corporate entities precludes the Depart- ' We .

ment of Revenue from combining their incomes to | ä

reflect the true character of their unitary business. | Js, Gene B. Day

We hold that it does not.“ Gene B. Daly

The question is fundamentally one of whether a | /s/ — — 1 — 1

business should stand in a better position for pur- /s/ Frank I. om

poses of determining income merely because it chooses Frank I. Haswell

to use a multiple corporation organizational scheme. | /s/ D 2 Gum

We do not feel that it should. We agree with the Daniel J. Shea

following statement of the California Supreme Court: Justi

7 [Alecepting, as we must, the application of

the law to unincorporated wholly controlled branches

or businesses located in other jurisdictions as set

forth in Butler Brothers v. McColgan, 17 Cal. 2d 664,

111 P. 2d 334; Id., 315 U.S. 501, 62 S.Ct. 701, 86 L. Ed.

991, the conclusion is ifresistible that the same rule

should apply to incorporated wholly controlled

branches or businesses so located. * * °*’ Edison

California Stores v. McColgan, supra at 473-74, 183

P.2d at 17.“

The decision of the district court is reversed. This case

is remanded to tk: district court with instructions to

18a

IN THE SUPREME COURT OF THE STATE OF MONTANA

(Caption Omitted in Printing)

Order

[Fp Aveust 11, 1977]

Per Curiam:

Having considered respondent’s petition for rehearing

in the above named cause,

Ir Is Orperep that the petition for rehearing is hereby

denied for the reasons stated in appellant’s objections

to respondent’s petition for rehearing.

Darxp this 10th day of August, 1977.

/3/ [ILLEGIBLE]

Chief Justice

/3/ James Conway Harrow

Js, Franx I. Haswetn

Js, Dante. J. Suea

Justices

19a

IN THE DISTRICT COURT OF THE FIRST JUDICIAL DISTRICT OF THE

STATE OF MONTANA, IN AND FOR THE COUNTY OF LEWIS 4 CLARK.

No. 37750

Montana DeparTMENT or Revenue, State or Montana,

Petitioner,

vs.

Tae American SMELTING AND Rerintinc Company,

Respondent.

Findings From the Record, Opinion,

Conclusions of Law. and Judgment.

This matter constitutes a proceeding for review of a

final determination of the State Tax Appeal Board of the

State of Montana pursuant to Section 84-709.1 R.C.M. 1947,

and with respect to the Montana Corporation License Tax

liability of respondent for the years 1967, 1968, 1969 and

1970.

On the 14th day of March, 1974, the State Tax Appeal

Board of the State of Montana in those certain proceed-

ings entitled American Smelting and Refining Company,

Appellant, vs. The Department of Revenue of the State

of Montana, Respondent’’, being No. CT-1973-17 before the

State Tax Appeal Board, made and entered its Findings

of Fact, Conclusions of Law, and Order.

That thereafter, and pursuant to Section 84-709.1, R.C.M.

1947, the Department of Revenue of the State of Montana,

filed its Petition for proceedings for review of said Find-

ings of Fact, Conclusions of Law and Order (herein re-

ferred to as ‘‘final decision’’) of said State Tax Appeal

Board of the State of Montana. That said Petition for

Review was filed on the 9th day of April, 1974.

That on the 16th day of May, 1974, the Department of

Revenue filed its motion : present additional evidence

20a

and a request for oral hearings and written briefs, and on

the 2nd day of December, 1974, filed an Amended Petition

to Present Additional Evidence.

The Department of Revenue of the State of Montana

was represented in this matter by Theodore W. deLooze,

Special Assistant Attorney General, admitted for the pur-

poses of this proceeding, and Terry B. Cosgrove, Special

Assistant Attorney General. The respondent, The American

Smelting and Refining Company, was represented by

George T. Bennett of the firm of Hughes, Bennett & Cain.

The matter having been fully briefed and twice orally

argued to the court, and the court having taken the appli-

cation of the Department of Revenue for leave to intro-

duce evidence under advisement, and the matter having

otherwise been submitted upon the record made before the

State Tax Appeal Board of the State of Montana, the

Court makes the following Findings From The Record,

Opinion, Conclusions of Law, and Judgment:

Finpincs From tHe Recorp

1. That the appellant, American Smelting and Refining

Company (ASARCO), is a corporation organized and

existing under the laws of the State of New Jersey, and is

qualified to do and doing business in the State of Montana,

and maintains its commercial domicile at 120 Broadway,

New York City, New York.

2. That the appellant is engaged in the business of min-

ing, smelting, refining, manufacturing, buying and selling

non-ferrous metals and other minerals, and, in addition,

receives income in the form of dividends, interest, pat-

ents, royalties, mine royalties and gains from the sale of

certain properties.

3. That the following active companies are wholly owned

subsidiaries of the appellant:

(a) ASARCO Developments (NZ) Ltd., a New Zea-

land corporation, engaged in the examination of

21a

mining properties, principally for others, in New

Zealand;

(b) ASARCO Exploration Company of Canada, Ltd.,

a Canadian corporation, engaged in the examina-

tion of mining properties;

(e) ASARCO (Australia) Pty., Limited, an Australian

corporation, engaged in the examination of min-

ing properties principally for others, in Aus-

tralia;

(d) ASARCO International Corporation, a Delaware

corporation, engaged in the sale of asbestos fibre

produced by Lake Asbestos of Quebec, Ltd.;

(e) ASARCO Mercantile Company, a Texas corpora-

tion, engaged in the purchase aud sale of manu-

factured products, principally for ASARCO and

certain subsidiaries;

(f) Bolivian Lead Corporation, a New York corpora-

tion, engaged in mining in Bolivia, South America;

(g) Compania American Smelting, S.A., a Chilean

corporation, engaged in the leasing of mineral

rights in Chile;

(h) Enthone, Incorporated, a Connecticut corpora-

tion, engaged in the manufacture and sale of metal

and other surface finishing chemicals and sup-

plies ;

(i) Federated Metals Canada Limited, a Canadian

corporation, engaged in producing chemicals in

Canada;

(j) International Metal Company, a New York corpo-

ration, a dealer in concentrates and metals;

(k) Lake Asbestos of Quebec, Ltd., a Delaware corpo-

ration, engaged in mining of asbestos ore and the

production of asbestos fibre in Canada;

22a

(1) Lone Star Lead Construction Corp., a New York

corporation, engaged as a contractor in construc-

tion of non-ferrous tank houses; and

(m) Northern Peru Mining Corporation, a Delaware

corporation, engaged in mining non-ferrous metals

in Peru.

4. That appellant owns and operates a smelter in East

Helena, Montana, where it receives lead ores and concen-

trates from company mines as well as unrelated suppliers.

The appellant’s East Helena, Montana, lead smelter ships

the refined lead product to other units of the appellant for

further treatment and ultimate sale, and sells by-products

of its smelting operation. The appellant also owns in Mon-

tana active and inactive mining properties.

5. That appellant is a unitary business and files its

Montana tax returns using the apportionment method.

6. That an audit was conducted of the books and records

of appellant for the years 1967, 1968, 1969, and 1970, by an

auditor of the Multistate Tax Commission.

7. That due to the audit conducted on the books and

records of appellant that a deficiency assessment was levied

against appellant for the years 1967, 1968, 1969, and

1970, in the amount of $409,145.07, of which $71,845.69 was

interest, none of which has been paid.

8. That appellant reported its income for Montana Cor-

poration License Tax purposes for the taxable years 1967

through 1970 in the following manner:

(a) Income from mine royalties consisting of the Key-

stone Mine in the State of Colorado was allocated

to the State of Colorado;

(b) Income from patents and copyrights were allo-

cated to commercial domicile;

23a

properties was allocated to the state where such

rental units are located;

(d) Interest income was allocated to the state of com-

mercial domicile;

(e) Gains from sales of tangible properties were allo-

cated to the state of sale;

(f) Dividends paid on stocks were allocated to state

of commercial domicile; and

(g) All other income was apportioned by the formula

prescribed by Section 84-1503, R.C.M. 1947.

9. That the Corporation License Tax Bureau of the De-

partment of Revenue, in making the deficiency assessment

as set forth in Exhibit E“, included all income of the

appellant, and by Federated Metals of Canada, ASARCO

Mercantile Company, Enthone, Inc., International Metal

Company, Lone Star Lead Construction Corp., and North-

ern Peru Mining Corporation; and treated all of such in-

come as apportionable by formulae whereby there was ap-

portioned to the State of Montana an allocated part based

on the relationship between the tangible property, sales,

and payroll, with respect to the Montana operation in re-

lation to the total operations.

10. That, with the exception of securities deposited with

various state agencies and monies deposited locally in the

State of Montana, the income from which have been allo-

cated to the State of Montana, all of the appellant’s

stocks, bonds, commercial paper and other evidences of

indebtedness are located outside of the State of Montana.

11. That all of the appellant’s income from mine royal-

ties, patents, copyrights, rental, interest, dividends and

gains upon sales of tangible or intangible properties, can

be properly segregated as to sources within and sources

without the State of Montana.

24a

12. That the business operations conducted by the ap-

pellant and the business operations conducted by its affili-

ated corporations are not interrelated or interdependent to

the extent that the net income of the appellant and any one

or more of its affiliated corporations cannot resonably be

determined without reference to the operations conducted

by the other companies and that the income of the affiliated

corporations has been properly reported by separate ac-

counting.

13. That the appellant for a number of years has

owned common stock of General Cable Corporation. That,

pursuant to a Consent Decree entered by the United

States District Court on March 15, 1967, in a proceeding

commenced by the Anti-Trust Division of the Justice De-

partment, the appellant and General Cable Corporation

were enjoined from having a director or officer who was

at the same time a director, officer or employee of the

other, and that the appellant give a proxy covering its

stock holdings to the persons designated by General

Cable’s board of directors prior to any stockholders’

meeting. On July 24, 1970, the Consent Decree was modi-

fied to require complete divestiture by appellant of all

of its common stockholdings of General Cable Corpora-

tion. Pursuant thereto, appellant did sell such stock in

the taxable year 1970.

14. That this is a proper proceeding for review of the

final decision of the State Tax Appeal Board of the State

of Montana instituted before this Court by the filing of

a Petition within thirty (30) days after service of the

final decision of the State Tax Appeal Board and pur-

suant to Section 84-709.1, R. C. M.

15. That the issues determined by the State Tax Ap-

peal Board of the State of Montana by its final decision

on the 14th day of March, 1974, were as follows:

(a) Whether American Smelting and Refining Com-

pany, for Montana Corporation License Tax purposes

25a

and pursuant to Sections 84-1501, et seq., R. C. M. 1947,

properly reported the following items of income as being

from sources without the State of Montana, viz., (1) in-

come from mine royalties consisting of the Keystone

Mine in the State of Colorado; (2) income from patents

and copyrights; (3) income from rental of housing units

on mining properties located outside the State of Mon-

tana; (4) interest income earned on bonds, commercial

paper and other evidence of indebtedness invested, main-

tained and located outside the State of Montana; (5)

gains from sales of properties located outside the State

of Montana; and (6) dividends paid on stocks located

and maintained at commercial domicile; and

(b) Whether the respondent, American Smelting and

Refining Company, could be required by the Department

to combine the income of Federated Metals of Canada,

Asarco Mercantile Company, Enthone, Inc., Interna-

tional Metal Company, Lone Star Lead Construction

Corp., and Northern Peru Mining Corporation, with its

income and allocate the same to the State of Montana.

16. The State Tax Appeal Board of the State of Mon-

tana determined as to the first issue that for the taxable

years 1967, 1968, 1969 and 1970, the respondent Ameri-

can Smelting and Refining Company had properly sepa-

rated its income from sources within the State of Mon-

tana from income from sources without the State of

Montana.

17. That as to the second issue the State Tax Appeal

Board of the State of Montana determined that the busi-

ness operations conducted by the respondent American

Smelting and Refining Company and the business opera-

tions conducted by its affiliated corporations were not

interrelated or interdependent to the extent that the net

income of the respondent American Smelting and Re-

fining Company in any one or more of its affiliated corp-

orations could not reasonably be determined without

26a

reference to the operations conducted by the other com-

panies, and that the income of the affiliated corporations

was properly reported by separate accounting.

18. That the respondent, Montana Department of Reve-

nue of the State of Montana, has by its amended petition

to present additional evidence, asked that the respondent

American Smelting and Refining Company be required to

answer certain questions with respect to its dividend, rental,

royalty, interest income, and gains on sale of capital as-

sets, the questions all being generally, whether, with re-

spect to such income received by the taxpayer for the

years listed, such income was ‘‘used in the trade or busi-

ness of the company”’ after it had been earned or derived.

19. The Department, appellant here, has offered no

reason why such proposed additional evidence was not

produced at the proceedings before the Department of

Revenue or before the State Tax Appeal Board and is

now the subject of an application before this Court.

From the foregoing Findings From the Record, the

Court makes the following:

OrIN LON

The respondent filed its Montana Corporation License

Tax returns for the taxable years in question and there-

after the Department of Revenue, acting in conjunction

with the Multi-state Tax Commission, audited such re-

turns and made adjustments with respect thereto. It is

these adjustments that are the subject of this controversy.

First, in adjusting the corporation license tax liability

of the respondent for the taxable years in question, the

Department made the following described adjustment to

dividend income, rental income, royalty income and gains

on sales of capital assets, whereas the respondent had,

as to such income, reported the same as follows accord-

ing to the findings of the Montana State Tax Appeal

Board:

27a

(a) Income from mine royalties consisting of the

Keystone Mine in the State of Colorado was

allocated to the State of Colorado;

(b) Income from patents and copyrights were allo-

cated to commercial domicile;

properties was allocated to the state where such

rental units are located;

(d) Interest income was allocated to the state of

commercial domicile;

(e) Gains from sales of tangible properties were al-

located to the state of sale;

(f) Dividends paid on stocks were allocated to state

of commercial domicile; and

(g) All other income was apportioned by the formu-

la prescribed by Section 84-1503, R.C.M. 1947.

As to its income from investments held and maintained

in Montana, the respondent treated such income as en-

tirely earned from sources within the State of Montana

and reported the income accordingly.

The Department of Revenue, purporting to act under

the principles“ of the Uniform Division of Income for

Tax Purposes Act, treated all of the respondent’s in-

vestment income, whether earned from sources within

or sources without the State of Montana, as business

income and required the same to be apportioned be-

tween Montana and other states according to a formula

based upon the ratio of sales, property and payroll within

and without the State of Montana. The State Board of

Equalization of the State of Montana, and predecessor

to the Department of Revenue, purported to adopt on

December 30, 1966, and effective with respect to tazable

years beginning on and after January 1, 1967, regulations

28a

numbered 1001, et seq., for the ‘‘allocation and appor-

tionment of income.“

The Department of Revenue contends that its prede-

cessor had a right to adopt such regulations and that it

has a right to enforce such regulations under the provi-

sions of Section 84-1503, R.C.M. 1947.

Under the Uniform Division of Income for Tax Pur-

poses Act, and under the regulations adopted by the

prior State Board of Equalization and attempted to be

enforced by the Department of Revenue, there is a dis-

tinction drawn between ‘‘businss income’’ and non-busi-

ness income.“ The term business income' is defined as

income arising from transactions and activity in the

regular course of the taxpayer’s trade or business and

includes income from tangible and intangible property

if the acquisition, management, and disposition of the

property constitute integral parts of the taxpayer’s regu-

lar trade or business operations.’’ As to rents, capital

gains, interest, dividends, royalties and other similar

types of investment income, if it is found to constitute

non-business income it is allocated pursuant to specific

allocation rules therein incorporated. Thus, as to the

passive or investment income of the respondent as de-

scribed by the Montana State Tax Appeal Board, the

Department of Revenue contended that respondent was

a unitary business within the meaning of the definition

contained in Regulations 1001, et seq; that all of the

income of the respondent constituted ‘‘business income;

and that, therefore, all of the passive or investment in-

come of the respondent, whether it was clearly earned

from sources within the State of Montana or clearly

earned from sources without the State of Montana, was

to be allocated according to the formula the factors of

which are payroll, property and sales.

In this Court’s opinion, Section 84-1503, R.C.M. 1947,

as effective for the taxable years 1967 through 1970, in-

29a

elusive, is controlling. Pursuant to that section, the De-

partment of Revenue and its predecessor, the State Board

of Equalization, had the authority to adopt regulations

as to the apportionment of income only where it finds

that such income cannot be properly segregated as to

sources within or without the State. The section pro-

vided, for the taxable years in question:

If the income of any corporation from sources

within the state cannot be properly segregated from

income without the state, then, in that event, the

amount of the net income returned shall be that

proportion of the taxpayer’s total net income which

the taxpayer’s gross business done in the state of

Montana bears to the total gross business of the

taxpayer, and apportionment shall be made under

the rules and regulations prescribed by the state

board of equalization, giving consideration to sales,

property and payroll and such other factors as may

be deemed applicable; provided, however, that the

state board of equalization shall, upon the presen-

tation of satisfactory evidence, determine that the

income from sources within the state of Montana

may be properly segregated from income from sources

without the state of Montana and shall allow separate

accounting. The board shall publish not less than

once a year, all rules and regulations pertair‘ng to

this section. All decisions by the board under this

section shall be subject to judicial review in an ac-

tion prosecuted by the corporation in the district

court of Lewis and Clark county. The taxpayer can-

not change from one method of accounting to another

method of accounting without first obtaining per-

mission from the board.

Under the clear and unambiguous language of this

section, the taxing authorities of the State of Montana

had the authority to adopt rules and regulations only as

30a

to the apportionment of such income as could not be

segregated as to source. If income could be segregated

as to source, then it was allocable to that source in its

entirety. Secondly, this section very clearly provides that

the taxing authorities of the State of Montana must, upon

the presentation of ‘‘satisfactory evidence’’, determine

„that the income from sources within the State of

Montana may be properly segregated from income from

sources without the State of Montana and shall allow

separate accounting’’. Here, the State Tax Appeal Board,

by its Finding No. 10 determined:

That, with the exception of securities deposited

with various state agencies and monies deposited

locally in the State of Montana, the income from

which have been allocated to the State of Montana,

all of the Appellant’s (Respondent’s) stocks, bonds,

commercial paper and other evidences of indebted-

ness are invested in intangibles outside of the State

of Montana and all of such evidences of indebted-

ness are located outside of the State of Montana.

The Montana State Tax Appeal Board, by its Finding

No. 11, found and determined:

That all of the Appellant’s (Respondent’s) income

from mine royalties, patents, copyrights, rental, in-

terest, dividends and gains upon sales of tangible or

intangible properties, can be properly segregated as

to sources within and sources without the State of

Montana.“

The Department of Revenue apparently does not quar-

rel with the Findings of the State Tax Appeal Board

quoted hereinabove. To the contrary, the contention of

the Department is that ‘‘source of income’’ is no longer

the test, that the test is whether or not such income con-

stitutes business income as defined in the Uniform

3la

Division of Income for Tax Purposes Act. In this respect,

this Court must point out that Section 84-1503, R. C. M.

1947, was in fact amended by Section 2, Chapter 5 of

the Laws of 1974, effective as to all taxable years on

and after December 31, 1973, to specifically make applic-

able to the Montana Corporation License Tax the pro-

visions of the Uniform Division of Income for Tax

Purposes Act, and, in addition, by Section 84-1503,

R.C.M. 1947, Subsection (1)(a), a definition of unitary

business. Prior to this amendment, the only definition of

unitary business contained in the Montana Corporation

License Tax Act was in Section 84-1509, R.C.M. 1947,

with regard to affiliated corporations. The Montana Cor-

poration License Tax Act, prior to this amendment, did

not contain any definition of nor did it make any dis-

tinction between so-called business or ‘‘non-business’’

income. There is no issue before this Court as to whether

or not the respondent is a unitary business under Section

84-1503, R. C. M. 1947, as amended by Section 2, Chapter 5,

Laws of 1974, and effective for all taxable years on and

after December 31, 1973. Very clearly the question here is

the interpretation of Section 84-1503, R.C.M. 1947, prior

to the 1974 amendments. Section 84-1503, R.C.M. 1947,

prior to such amendments, is clear and unambiguous. It

allows the taxpayer to segregate income which can be

clearly identified as to source. There appears to be no

question here that if this is the test that the income of the

respondent which is in question here can be identified

as to source. This being determinative, the decision of the

Montana State Tax Appeal Board with respect thereto

is correct.

In interpreting Section 84-1503, R. C. M., prior to its

amendment in 1974, this Court is to ascertain and give

effect to the intention of the Legislature as expressed

in the statute; Section 93-401-16, R. C. M. Where the

plain meaning of words used indicate the legislative in-

32a

tent, courts may not go further and apply any other

means of interpretation. State ex rel. Huffman v. District

Court, 154 Mont. 201, 461 P.2d 847.

Here, the key language of Section 84-1503, as then

effective, is:

If the income of any corporation from sources with-

in the state cannot be properly segregated from in-

come without the state, then, in that event..

(Emphasis supplied.)

The ‘‘event’’ which triggers Section 84-1503 is where

income cannot be properly segregated and this is the

express holding of the Supreme Court in Montana Life

Insurance Company v. Shannon, 106 Mont. 500, 78 P.2d

946, where it is said (P.504):

Furthermore, when the amount of gross income

within the state was known and determined properly,

then the principal question involved in this litiga-

tion was thereby settled. In the circumstances of this

case, the Board could not properly invoke the rule

of Section 2297.1 (now Section 84-1503, R. C. M.

1947) as the statute has no application here.’’

Additionally, the Department was required under Sec-

tion 84-1503, R. C. M., as effective, to allow the taxpayer to

segregate income intermingled as to source by separate

accounting and upon ‘‘satisfactory’’ evidence that this

could be done.

In contrast, the Legislature has changed this rule by its

1974 amendments to Section 84-1503, R. C. M. Under this

section as amended, separate accounting is not allowed to a

‘‘unitary’’ business and the term ‘‘unitary”’ is defined in

different terms from those contained in Section 84-1509,

R. C. M.

33a

In short, it would appea. that the Legislature by this

amendment in 1974, has changed the rule from ‘‘source of

income’’ to nature of income (business or non-business)

and changed the rule of accounting as to unitary and non-

unitary businesses.

There is a presumption that in amending an existing

statute (Section 84-1503), that the legislature intended to

make a change therein; State ex rel Dick Irvin, Inc., v.

Anderson, (1974) —— Mont. ——, 525 P.2d 564; Montana

Milk Control Brd. v. Community Creamery Company, 139

Mont. 523, 366 P.2d 151; Van Tigham v. Lennane, 136 Mont.

547, 349 P.2d 569.

Here there is more than just a presumption of change as

to such statute. Here, clearly, the Legislature has shifted

from the ‘‘source’’ rule to the unitary or ‘‘non-unitary”’

„business“, ‘‘non-business’’ income approach. In light of

this the attempt by the taxing authorities to make such a

change by Regulations 1001, et seq., prior to such 1974

legislative change, was ineffective.

Turning to the second issue, the respondent, in reporting

its taxable income to the State of Montana for the taxable

years 1967 through and including 1970, did not include the

income of any of its affiliated corporations which are not

doing business within the State of Montana. The Depart-

ment of Revenue in making its deficiency assessments for

these years included with the income of respondent the in-

come of Federated Metals of Canada, Asarco Mercantile

Company, Enthone, Inc., International Metal Company,

Lone Star Lead Construction Corp., and Northern Peru

Mining Corporation, on the theory that all of these corpo-

rations were ‘‘unitary’’ under Regulations 1001, et seq.

This income then having been deemed to be the income of

the respondent was apportioned according to the formula

based upon sales, property and payroll.

34a

The Montana State Tax Appeal Board, by its Finding of

Fact No. 12, found and determined:

That the business operations conducted by the Appel-

lant (Respondent) and the business operations con-

ducted by its affiliated corporations are not interrelated

or interdependent to the extent that the net income

of the Appellant (Respondent) and any one or more

of its affiliated corporations cannot reasonably be de-

termined without reference to the operations con-

ducted by the other companies and that the income of

the affiliated corporations has been properly reported

by separate accounting.“

In light of this Finding of Fact, the State Tax Appeal

Board correctly determined that under Section 84-1509,

R. C. M. 1947, the Department could not require the in-

come of these affiliated corporations to be combined or con-

solidated with the income of the respondent.

The Department of Revenue, on the other hand, argues

that Section 84-1509, R. C. M. 1947, is not the controlling

statute. At page 17 of the Department’s final brief in this

matter, it states, commencing at Line 26:

In no way can Scction 84-1509 be read as a statute

providing for combination. The authority for combin-

ing the company and its subsidiaries is found in the

case law and the Department’s Regulations 1001.“

The Court has examined the Department’s Regulatioa

**1001’’. Section 1001 of the Department’s regulations

speaks in all three paragraphs of ‘‘a corporation subject

to this tax’’, or ‘‘a corporation engaged in a ‘unitary’

business operation within and without Montana’’, and ‘‘a

corporation not engaged in a unitary business... . In all

instances, this regulation deals with a single corporation.

If it was the intent of this regulations to apply to affiliated

corporations, then it should have so stated. In any event,

35a

it is the opinion of this Court that the Department of Rev-

enue and its predecessor, the State Board of Equalization,

had no authority to go beyond the clear provisions of Sec-

tion 84-1509, R. C. M. 1947. The Legislature of the State

of Montana having, by Section 84-1509, R. C. M. 1947, ad-

dressed itself to the problem of the combining or consoli-

dating of income of affiliated corporations, and this section

being the only section in the Montana Corporation License

Tax Act which deals with affiliated corporations, it is con-

trolling.

The express mention of one subject or authority in an

act (affiliated corporations under Section 84-1509) excludes

other similar matters not mentioned; Helena Valley Irri-

gation District v. State Highway Commission, 150 Mont.

192, 433 P. 2d 791; Reed v. Reed, 130 Mont. 409, 304 P.2d

590; Stephens v. City of Great Falls, 119 Mont. 368, 175

P.2d 408. The Court must reject the Department’s conten-

tion that it can rely upon its own regulations or ‘‘case

law’’ to come to a different requirement than that ex-

pressed in the act.

The Court has examined the ‘‘case law’’ as cited by the

Department and such ‘‘case law’’ consists of cases from

the State of California and the State of Oregon construing

statutes of those states which are different from those con-

tained in the Montana Corporation License Tax Act. It is

the opinion of this Court that the Department of Revenne

must, for the taxable years here in question, find its au-

thority to combine or consolidate the income of affiliated

corporations under the provisions of Section 84-1509, R. C.

M. 1947, and the State Tax Appeal Board, having deter-

mined that this section does not require the combination

or consolidation of the respondent with its affiliated cor-

porations, its decision must be affirmed.

Lastly, the Department of Revenue has filed herein an

Amended Petition to Present Additional Evidence. There

has been no satisfactory reason advanced by the Depart-

36a

ment for failure to present the evidence before the State

Tax Appeal Board. (See Section 82-4216 as amended.) Ad-

ditionally such evidence is irrelevant in view of this Court’s

opinion as to the law under which the American Smelting

and Refining Company is to be taxed for the years in

question.

Conc.Lusions or Law

That the Findings of Fact, Conelusions of Law and Or-

der of the State Tax Appeal Board of the State of Mon-

tana so made on the 14th day of March, 1974, constituting

its final decision, should be by this Court affirmed in all

respects.

II.

That the application of the appellant, Department of

Revenue, for leave to introduce additional evidence should

be denied.

III.

That pursuant to Section 84-1503, R. C. M. as effective for

the taxable years 1967, 1968, 1969 and 1970, the Depart-

ment of Revenue had the authority to adopt rules and reg-

ulations only with respect to the ‘‘apportionment’’ of in-

come which could not be properly segregated as to source.

The Department of Revenue of the State of Montana had

no authority under this section to adopt regulations which

attempted to define source of income or to define unitary

business or unitary operation.

IV.

That Section 84-1503, R.C.M. 1947, for the taxable years

in question, required that the Department of Revenue al-

low a taxpayer upon satisfactory evidence to separately

account for income from sources within the State of Mon-

37a

tana and income from sources without the State of Mon-

tana.

That Section 84-1509, R. C. M. 1947, is the only provision

of the Corporation License Tax Act applicable for the tax-

able years 1967, 1968, 1969 and 1970 which contains a defi-

nition of unitary business operation or deals with the re-

quirement of consolidated or combined returns of income

between related corporations. That the definition of unitary

‘business operation therein contained requires that one busi-

ness operation be so conducted by the corporation and the

affiliated group that they are interrelated or interdepend-

ent to the extent that the net income of one corporation

cannot be reasonably determined without reference to the

operations conducted by the other corporations.

VI.

That the State Tax Appeal Board correctly found and

determined that the respondent’s dividend income, rental

income, royalty income and income from gains on sale of

assets had been properly segregated and identified as to

its source within or without Montana under Section 84-

1503, R. C. M. 1947.

VII.

That the State Tax Appeal Board correctly found and

determined that all of the respondent's stocks, bonds, com-

mercial paper and other evidences of indebtedness are in-

vested in intangibles outside of the State of Montana ex-

cept as to those investments held in Montana and totally

allocated to Montana, and that all of such evidences of in-

debtedness are located outside of the State of Montana

and therefore such income having been identified as to

source was properly reported by respondent.

38a

VIII.

That the State Tax Appeal Board correctly found and

determined that the business operations conducted by the

respondent, American Smelting and Refining Company, and

the business operations conducted by its affiliated corpora-

tions are not interrelated or interdependent to the extent

that the net income of the respondent and any one or more

of its affiliated corporations cannot reasonably be deter-

mined without reference to the operations conducted by

the other companies and that the income of the affiliated

corporations had been properly reported by separate ac-

counting.

IX.

That the respondent, American Smelting and Refining

Company, properly reported its income for the taxable

years 1967, 1968, 1969 and 1970 pursuant to the appro-

priate provisions of the Montana Corporation License Tax

Act as contained in Sections 84-1501, et seq., R.C.M. 1947.

JUDGMENT

Upon the foregoing Findings From The Record and

Conclusions of Law, the Court makes the following Judg-

ment:

Ir Is Heresy Orperep, Apsupcep and Decreep that the

final decision of the State Tax Appeal Board of the State

of Montana as contained in its Findings of Fact, Conclu-

sions of Law and Order’’, is in all respects by this Court

affirmed.

Dated this 17 day of December, 1975.

/s/ Peter G. MxLor

District Judge

39a

BEFORE THE STATE TAX APPEAL BOARD

OF THE STATE OF MONTANA

(Caption Omitted in Printing)

Findings of Fact, Conclusions of Law, and Order

Hearing on the appeal of American SMELTING AND RerFtn-

Id Company, pursuant to Section 84-708, R. C. M. 1947, came

on regularly for hearing before the Board on January 7,

1974, at 10:00 a.m., in the City of Helena, Montana, from

a decision of the Department of Revenue denying Appel-

lant’s requested relief with respect to the combining or con-

solidating of affiliated corporations with Appellant for tax

purposes and refusing to set aside the deficiency assess-

ments levied against said Appellant based thereon and the

decision of the Department of Revenue in treating all of

Appellant’s income, regardless of source or nature, as allo-

catable by formula, contrary to the Corporation License Tax

Act of the State of Montana, and refusing to set aside the

deficiency assessments based thereon for the taxable years

1967, 1968, 1969, and 1970; the Appellant, American Smelt-

ing and Refining Company, appearing through its attorney,

George T. Bennett, Esq., of the firm of Hughes, Bennett

and Cain, Helena, Montana; and the Department of Rev-

enue being represented by Terry B. Cosgrove, Esq., Assist-

ant Tax Counsel; and the Board having heard the testi-

mony and having examined all of the evidence and briefs

offered by all parties, and the Board being fully advised in

the premises, does hereby make its Findings of Fact, Con-

clusions of Law and Order as follows:

Fixbixos or Fact

1. That the Appellant, American Smelting and Refin-

ing Company (ASARCO), is a corporation organized and

existing under the laws of the State of New Jersey, and is

qualified to do and doing business in the State of Montana,

40a

and maintains its commercial domicile at 120 Broadway,

New York City, New York.

2. That the Appellant is engaged in the business of min-

ing, smelting, refining, manufacturing, buying and selling

non-ferrous metals and other minerals, and, in addition, re-

ceives income in the form of dividends, interest, patents,

royalties, mine royalties and gains from the sale of certain

properties.

3. That the following active companies are wholly

owned subsidiaries of the Appellant:

(a) ASARCO Developments (NZ) Ltd., a New Zea-

land corporation, engaged in the examination of

mining properties, principally for others, in New

Zealand;

(b) ASARCO Exploration Company of Canada, Ltd.,

a Canadian corporation, engaged in the examina-

tion of mining properties;

(e) ASARCO (Australia) Pty., Limited, an Austra-

lian corporation, engaged in the examination of

mining properties, principally for others, in Aus-

tralia;

(d) ASARCO International Corporation, a Delaware

corporation, engaged in the sale of ashestos fibre

produced by Lake Asbestos of Quebec, Ltd.;

(e) ASARCO Mercantile Company, a Texas corpora-

tion, engaged in the purchase and sale of manu-

factured products, principally for ASARCO and

certain subsidiaries ;

(f) Bolivian Lead Corporation, a New York corpora-

tion, engaged in mining in Bolivia, South Amer-

ica;

(g) Compania American Smelting, S.A., a Chilean

corporation, engaged in the leasing of mineral

rights in Chile;

4la

(h) Enthone, Incorporated, a Connecticut corporation,

engaged in the manufacture and sale of metal and

other surface finishing chemicals and supplies;

(i) Federated Metals Canada Limited, a Canadian

corporation, engaged in producing chemicals in

Canada;

(j) International Metal Company, a New York cor-

poration, a dealer in concentrates and metals;

(k) Lake Asbestos of Quebec, Ltd., a Delaware corpo-

ration, engaged in mining of asbestos ore and the

production of asbestos fibre in Canada;

(1) Lone Star Lead Construction Corp., a New York

corporation, engaged as a contractor in construc-

tion of non-ferrous tank houses; and

(m) Northern Peru Mining Corporation, a Delaware

corporation, engaged in mining non-ferrous metals

in Peru.

4. That Appellant owns and operates a smelter in East

Helena, Montana, where it receives lead ores and concen-

trates from company mines as well as unrelated suppliers.

The Appellant’s East Helena, Montana, lead smelter ships

the refined lead product to other units of the Appellant for

further treatment and ultimate sale, and sells by-products

of its smelting operation. The Appellant also owns in Mon-

tana active and inactive mining properties.

5. That Appellant is a unitary business and files its Mon-

tana tax returns using the apportionment method.

6. That an audit was conducted of the books and records

of Appellant for the years 1967, 1968, 1969, and 970, by an

auditor of the Multistate Tax Commission.

7. That due to the audit conducted on the books and

records of Appellant that a deficiency assessment was

levied against Appellant for the years 1967, 1968, 1969,

42a

and 1970, in the amount of $409,145.07, of which $71,845.69

was interest, none of which has been paid.

8. That Appellant reported its income for Montana

Corporation License Tax purposes for the taxable years

1967 through 1970 in the following manner:

(a) Income from mine royalties consisting of the

Keystone Mine in the State of Colorado was allo-

cated to the State of Colorado;

(b) Income from patents and copyrights were allo-

cated to commercial domicile;

properties was allocated to the state where such

rental units are located;

(d) Interest income was allocated to the state of com-

mercial domicile ;

(e) Gains from sales of tangible properties were allo-

cated to the state of sale;

(f) Dividends paid on stocks were allocated to state

of commercial domicile; and

(g) All other income was apportioned by the formula

prescribed by Section 84-1503. R.C.M. 1947.

9. That the Corporation License Tax Bureau of the

Department of Revenue, in making the deficiency assess-

ment as set forth in Exhibit E“, included all income of

the Appellant, and by Federated Metals of Canada,

ASARCO Mercantile Company, Enthone, Inc., Interna-

tional Metal Company, Lone Star Lead Construction Corp.,

and Northern Peru Mining Corporation; and treated all

of such income as apportionable by formulae whereby

there was apportioned to the State of Montana an allo-

cated part based on the relationship between the tangible

property, sales, and payroll, with respect to the Montana

operation, in relation to the total operations.

43a

10. That, with the exception of securities deposited with

various state agencies and monies deposited locally in the

State of Montana, the income from which have been allo-

cated to the State of Montana, all of the Appellant’s

stocks, bonds, commercial paper and other evidences of

indebtedness are invested in intangibles outside of the

State of Montana and all of such evidences of indebted-

ness are located outside of the State of Montana.

11. That all of the Appellant’s income from mine royal-

ties, patents, copyrights, rental, interest, dividends and

gains upon sales of tangible or intangible properties, can

be properly segregated as to sources within and sources

without the State of Montana.

12. That the business operations conducted by the Ap-

pellant and the business operations conducted by its affili-

ated corporations are not interrelated or interdependent

to the extent that the net income of the Appellant and any

one or more of its affiliated corporations cannot reasonably

be determined without reference to the operations conducted

by the other companies and that the income of the affiliated

corporations has been properly reported by separate ac-

counting.

13. That the Appellant for a number of years has owned

common stock of General Cable Corporation. That, pursu-

ant to a Consent Decree entered by the United States Dis-

trict Court on March 15, 1967, in a proceeding commenced

by the Anti-Trust Division of the Justice Department, the

Appellant and General Cable Corporation were enjoined

from having a director or officer who was at the same time

a director, officer or employee of the other, and that the

Appellant give a proxy covering its stock holdings to the

persons designated by General Cable’s board of directors

prior to any stockholders’ meeting. On July 24, 1970, the

Consent Decree was modified to require complete divesti-

ture by Appellant of all of its common stockholdings of

General Cable Corporation. Pursuant thereto, Appellant

did sell such stock in the taxable year 1970.

44a

ConcLusions or Law

1. That the gain upon the sale by Appellant of its shares

of common stock of General Cable Corporation was income

derived from a forced sale and was not income from a sale

in the regular course of Appellant’s trade or business.

2. That as to those matters on appeal to this Board, the

Appellant properly reported all of its income from mine

royalties, patents, copyrights, rental, interest, dividends

and gains upon sale of tangible or intangible properties

and properly allocated such income to sources within and

without the State of Montana.

3. That Appellant properly reported all of its income

from its integrated mining, smelting and refining business,

and properly apportioned to the State of Montana the

proper portion thereof under appropriate formulae as to

those matters on appeal to this Board.

4. That all Appellant’s income as to those matters on

appeal to this Board was properly reported, allocated and

apportioned in accordance with the Montana Corporation

License Tax Act effective for the taxable years in ques-

tion.

5. That the Appellant cannot be required to file com-

bined or consolidated reports with any affiliated corpora-

tion.

ORDER

Based on the above Findings of Fact and Conclusions of

Law, Ir Is Heresy Onperep:

1. That the Taxpayer’s appeal from the decision of the

Department of Revenue is granted.

2. That the Corporation License Tax Bureau of the De-

partment of Revenue recompute the deficiency assessment

for the taxable years 1967, 1968, 1969, and 1970, in accord-

ance with the Corporation License Tax Returns filed by

45a

Appellant (Exhibits ‘‘A’’ to D') and render a statement

to the Appellant for such taxes and interest thereon to

date as and for the Appellant’s liability, subject, however,

to the adjustments hereafter mentioned, which were or-

dered by the Department of Revenue following its hearing

in this matter and which were not « part of this appeal:

(a) Adjustment for the value of the Block P Mine in

the property factor;

(b) Adjustment for property in bonded warehouses;

(d) Adjustment for payments of tax made by Tax-

payer as a result of Federal audit; and

(e) Adjustments necessary by reason of the Federal

audit for taxable year 1969.

3. Subject to the above, and subject to the 1970 Federal

audit, the deficiencies for all taxable years in question are

hereby set aside and vacated.

Datep this 14th day of March, 1974.

By Orper oF THE

Srate Tax Appeat Boarp

/s/ Ray J. Wayrynen

Ray J. Wayrynen, Chairman

/3/ Heven M. Peterson

Helen M. Peterson, Member

Member J. Monz Cooper dissenting:

I dissent.

/3/ J. Mom Coorer

J. Morley Cooper, Member

ATTEST :

/s/ Vernon B. Muze

Vernon B. Miller, Secretary

46a

APPENDIX B

IN THE DISTRICT COURT OF THE FIRST JUDICIAL DISTRICT OF THE

STATE OF MONTANA, IN AND FOR THE COUNTY OF LEWIS AND

CLARK

Montana DepaRTMENT oF Revenue, of the State of

Montana, Petitioner,

-Vs-

AMERICAN SMELTING AND Rerininc Company, Respondent.

No. 37750

Judgment on Remittitur

(Filed August 18, 1977)

Tuts Action came on regularly for hearing before this

Court, the Petitioner, Montana Department of Revenue,

appeared in this matter by Theodore W. deLooze, Special

Assistant Attorney General, and Terry B. Cosgrove, Spe-

cial Assistant Attorney General, the Respondent, American

Smelting and Refining Company appeared by its attorney,

George T. Bennett of the firm of Hughes, Bennett & Cain.

The matter having been fully briefed and twice orally

argued to the Court, the Court entered Findings From the

Record, Opinion, Conclusions of Law and Judgment, on

the 17th day of December, 1975, in favor of the Respond-

ent.

That Order was appealed to the Montana Supreme

Court, after the filing of briefs and oral argument, the

said Montana Supreme Court reversed the Judgment and

47a

a Remittitur was issued by the Clerk of the Montana Su-

preme Court on the llth day of August, 1977, and this

Court was directed to enter Judgment in favor of the

Petitioner.

Wauenrerore, by virtue of the law and by reason of the

premises aforesaid, It Is OnpEreEp, AJuDGED AND DEcREED

AND Tus Dogs Orper, A upon A&D Decree that the Re-

spondent, American Smelting and Refining Company, is

ordered to pay to the Petitioner, Montana Department of

Revenue, $497,776.47, plus interest, as provided by law, and

that Petitioner have execution therefore.

Done anv Daten TRIAS 18 or Aveust, 1977.

75s, Jm C. Meoy

District Judge

48a

APPENDIX C

In Tue Districr Court For Tue Fer Juicer.

Districr Or TRR State Or Montana, In Anp For

Tue County Or Lewis Anp CLARK

Civil No. 37750

Montana DEPARTMENT OF Revenut, State or Montana,

Petitioner,

ASARCO Incorporatep (formerly THe AMERICAN

Sme.tinc Anp Rerininc Company), Respondent.

Notice of Appeal to the Supreme Court

of the United States

Notice is hereby given that the Respondent above-named,

ASARCO Incorporated (formerly The American Smelt-

in and Refining Company), hereby appeals to the Su-

preme Court of the United States from the final judg-

ment, opinion and order of the Supreme Court of the

State of Montana, reversing the judgment of the Dis-

trict Court of the First Judicial District, and from the

order denying petition for rehearing, entered in this action

on August 11, 1977.

This appeal is taken pursuant to 28 U.S.C. §1257(2).

/s/ Grorce T. Bennett

George T. Bennett

Counsel for Respondent

(Affidavit Of Service Omitted In Printing)

49a

IN THE SUPREME COURT

OF THE

STATE OF MONTANA

Cause No. 13249

Montana DepartTMENT Or RevENvE

Or TRR State Or Montana,

Petitioner and Appellant,

S-

ASARCO Incorporatep (formerly THe AMERICAN

Smeitine AND Rerinina Company),

Defendant and Respondent.

Notice of Appeal to the Supreme Court

of the United States

(Filed October 6, 1977)

/8/ Ricuarp T. Consoy

Richard T. Conboy

Deputy Clerk of Supreme Court

Helena, Montana

Notice is hereby given that the Defendant and Re-

spondent above-named, ASARCO Incorporated (formerly

The American Smelting and Refining Company), hereby

appeals to the Supreme Court of the United States from

the final judgment, opinion and order of the Supreme

Court of the State of Montana, reversing the judgment

oi the District Court of the First Judicial District, and

from the order denying petition for rehearing, entered

in this action on August 11, 1977.

50a

This appeal is taken pursuant to 28 U.S.C. § 1257(2).

7s, Grorce T. Bennett

George T. Bennett

Counsel for Defendant and Respondent

(Affidavit Of Service Omitted In Printing)

51a

APPENDIX D

Section 84-1503, Revised Code of Montana 1947:

If the income of any corporation from sources

within the state cannot be properly segregated from

income without the state, then, in that event, the

amount ot the net income returned shall be that pro-

portion of the taxpayer’s total net income which the

taxpayer’s gross business done in the state of Mon-

tana bears to the total gross business of the taxpayer,

and apportionment shall be made under the rules

and regulations prescribed by the state board of

equalization, giving consideration to sales, property

and payroll and such other factors as may be deemed

applicable; provided, however, that the state board

of equalization shall, upon the presentation of satis-

factory evidence, determine that the income from

sources within the state of Montana may be properly

segregated from income from sources without the

state of Montana and shall allow separate account-

ing. The board shall publish not less than once a year,

all rules and regulations pertaining to this section.

All decisions by the board under this section shall

be subject to judicial review in an action prosecuted

by the corporation in the district court of Lewis and

Clark county. The taxpayer cannot change from one

method of accounting to another method of account-

ing without first obtaining permission from the

board.“

Amended Regulation (Chapter 10) Adopted December 30, 1966.

Effective With Respect to Taxable Years Beginning on or After

January 1, 1967.

1001. General. When the income of a corporation sub-

ject to this tax is derived from or attributable to sources

both within and without Montana, the tax is measured

by the total net income derived from or attributable to

52a

sources within Montana, and the corporation shall al-

locate and apportion its income as provided in this chap-

ter of these regulations. It is the intent of regulations

1002 through 1019 to adopt the principles embodied in

the ‘‘Uniform Division of Income for Tax Purposes

Act’’, and they shall be so construed.

A corporation engaged in a ‘‘unitary’’ business opera-

tion within and without Montana must apportion its busi-

ness income as provided for under section 1010. A busi-

ness is unitary when the operation of the business with-

in the state is dependent upon or contributory to the

operation of the business outside the state or if the units

of the business within and without the state are closely

allied and not capable of separate maintenance as inde-

pendent businesses.

A corporation not engaged in a unitary business opera-

tion must allocate its business income by means of

separate accounting methods as provided for under sec-

tion 1020; provided, its books and records are so kept

that the income and expense attributable to business

operations within the state can be properly segregated

from total income and expense. If the corporation’s books

and records do not permit such proper segregation, its

business income must be apportioned according to the

provisions of section 1010.

1002. Definitions. As used in this chapter of these regu-

lations, unless the context otherwise requires:

(a) ‘‘Business income’’ means income arising from

transactions and activity in the regular course of the

taxpayer’s trade or business and includes income from

tangible and intangible property if the acquisition, man-

agement, and disposition of the property constitute inte-

gral parts of the taxpayer’s regular trade or business

operations.

53a

(b) ‘‘Commercial domicile’’ means the principal place

from which the trade or business of the taxpayer is di-

rected or managed.

(e) ‘*Compensation’’ means wages, salaries, commis-

sions and any other form of remuneration paid to em-

ployees for personal services.

(d) ‘‘Non-business income means all income other

than business income.

(e) ‘‘Sales’’ means all gross receipts of the taxpayer

not allocated under sections 1005 through 1009 of these

regulations.

(f) State“ means any state of the United States, the

District of Columbia, the Commonwealth of Puerto Rico,

any territory or possession of the United States, and any

foreign country or political subdivision thereof.

1003. Any corporation having income from business ac-

tivity which is taxable both within and without this state

shall allocate and apportion its net income as provided

in this chapter of these regulations.

1004. For purposes of allocation and apportionment of

income under this chapter of these regulations, a corpora-

tion is taxable in another state if (1) in that state it is

subject to a net income tax, a franchise tax measured by

net income, a franchise tax for the privilege of doing

business, or a corporate stock tax, or (2) that state has

jurisdiction to subject the corporation to a net income

tax regardless of whether, in fact, the state does or does

not.

1005. Rents and royalties from real or tangible personal

property, capital gains, interest, dividends, or patent or

nonbusiness income, shall be allocated as provided in

section 1006 through 1009 of this chapter of these regu-

lations.

54a

1006. (a) Net rents and royalties from real property

located in this state are allocable to this state.

(b) Net rents and royalties from tangible personal

property are allocable to this state:

(1) if and to the extent that the property is utilized

in this state, or

(2) in their entirety if the taxpayer’s commercial

domicile is in this state and the taxpayer is not

organized under the laws of or taxable in the

state in which the property is utilized.

erty in a state is determined by multiplying the rents and

royalties by a fraction, the numerator of which is the

number of days of physical location of the property in

the state during the rental or royalty period in the tax-

able year and the denominator of which is the number of

days of physical location of the property everywhere

during all rental or royalty periods in the taxable year.

If the physical location of the property during the rent-

al or royalty period is unknown or unascertainable by the

taxpayer, tangible personal property is utilized in the

state in which the property was located at the time the

rental or royalty payer obtained possession.

1007.

(a) Capital gains and losses from sales or other dis-

positions of real property located in this state are al-

locable to this state.

(b) Capital gains and losses from sales or other dis-

positions of tangible personal property are allocable to

this state if:

(1) the property had a situs in this state at the time

of the sale or other disposition, or

55a

(2) the taxpayer’s commercial domicile is in this

state and the taxpayer is not taxable in the

state in which the property had a situs.

positions of intangible personal property are allocable

to this state if the taxpayer’s commercial domicile is in

this state.

1008. Interest and dividends are allocable to this state

if the taxpayer’s commercial domicile is in this state.

1009.

(a) Patent and copyright royalties are allocable to this

state:

(1) if and to the extent that the patent or copyright

is utilized by the payer in a state in which the

taxpayer is not taxable and the taxpayer’s com-

mercial domicile is in this state.

(b) A patent is utilized in a state to the extent that it

is employed in production, fabrication, manufacturing, or

other processing in the state or to the extent that a

patented product is produced in the state. If the basis of

receipts from patent royalties does not permit allocation

to states or if the accounting procedures do not reflect

states of utilization, the patent is utilized in the state in

which the taxpayer’s commercial domicile is located.

printing or other publication originates in the state. If the

basis of receipts from copyright royalties does not permit

allocation to states or if the accounting procedures do not

reflect states of utilization, the copyright is utilized in the

state in which the taxpayer’s commercial domicile is

located.

1010. All business income shall be apportioned to this

state by multiplying the income by a fraction, the numer-

56a

ator of which is the property factor plus the payroll factor

plus the sales factor, and the denominator of which is

three.

1011. The property factor is a fraction, the numerator

of which is the average value of the taxpayer’s real and

tangible personal property owned or rented and used in

this state in the production of business income during the

tax period and the denominator of which is the average

value of all the taxpayer’s real and tangible personal

property owned or rented and used in the production of

business income during the tax period.

1012. Property owned by the taxpayer is valued at its

original cost. Property rented by the taxpayer is valued

at eight times the net annual rental rate. Net annual

rental rate is the annual rental rate paid by the taxpayer

less any annual rental rate received by the taxpayer from

sub-rentals.

1013. The average value of property shall be determined

by averaging the values at the beginning and ending of

the tax period but the State Board of Equalization may

require to reflect properly the average value of the tax-

payer’s property.

1014. The payroll factor is a fraction, the numerator of

which is the total amount paid in thie state during the tax

period by the taxpayer for compensation related to busi-

ness income, and the denominator of which is the total

compensation related to business income paid everywhere

during the tax period.

1015. Compensation is paid in this state if;

(a) the individual’s service is performed entirely with-

in the state; or

(b) the individual’s service is performed both within

and without the state, but the service performed with-

57a

out the state is incidental to the individual’s service

within the state; or

(e) some of the service is performed in the state and

(1) the base of operations or, if there is no base of

operations, the place from which the service is directed

or controlied is in the state or (2) the base of operations

or the place from which the service is directed or con-

trolled is not in any state in which some part of the

service is performed, but the individual’s residence is in

this state.

1016. The sales factor is a fraction, the numerator of

which is the total sales of the taxpayer in this state

during the tax period, and the denominator of which is

the total sales of the taxpayer everywhere during the

tax period.

1017. Sales of tangible personal property are in this

state if:

(a) the property is delivered or shipped to a pur-

chaser, other than the United States government, within

this state regardless of the f.o.b. point or other conditions

of the sale; or

(b) the property is shipped from an office, store, ware-

house, factory, or other place of storage in this state and

(1) the purchaser is the United States government, or

(2) the taxpayer is not taxable in the state of the pur-

chaser.

1018. Sales, other than sales of tangible personal prop-

erty, are in this state if:

(a) the income-producing activity is performed in this

state; or

(b) the income-producing activity is performed both

in and outside this state and a greater proportion of the

income-producing activity is performed in this state than

in any other atate, based on costs of performance.

58a

1019. If the allocation and apportionment provisions of

sections 1002 through 1018 of this chapter of these regu-

lations do not fairly represent the extent of the tax-

payer’s business activity in this state, the taxpayer may

petition for or the State Board of Equalization may re-

quire, in respect to all or any part of the taxpayer’s

business activity, if reasonable:

(a) separate accounting, if permitted within the scope

of section 1001 of this chapter of these regulations;

(b) the exclusion of any one or more of the factors;

(e) the inclusion of one or more additional factors

which will fairly represent the taxpayer’s business ac-

tivity in this state; or

(d) the employment of any other method to effectuate

an equitable allocation and apportionment of the tax-

payer’s income.

1020. Use of Separate Accounting Method. in applying

the separate accounting method, each item of income is

segregated and directly allocated according to its source.

Any expense or other deductible items, including a rea-

sonable allowance for general overhead expenses, attribut-

able to the earning of such income are likewise segre-

gated and deducted from such income. Items of nonbusi-

ness income are to be allocated as provided for under

sections 1005 through 1009 of this chapter of these regu-

lations.

59a

13249

No. 37750

IN THE

SUPREME COURT

OF THE

STATE OF MONTANA

Montana DEeparTMENT oF Revenue, State or Montana,

Petitioner-Appellant,

TRR AMERICAN SMELTING AND Rerintne Company,

Defendant-Respondent

Appellant's Brief

Appellant’s Brief on Appeal from the District Court of

the First Judicial District of the State of Montana,

in and for the County of Lewis and Clark. '

Txropore W. de Looze

Special Assistant Attorney General

Depariment of Justice

State Office Building

Salem, Oregon 97310

Terry B. Coscrove

Special Assistant Attorney General

P. O. Box 1144

Helena, Montana 59601

Attorneys for Petitioner-Appellant

Georce T. Bennetr

Hueues, Bennett & Cain

406 Fuller Avenue

Helena, Montana 59601

Attorneys for Defendant-Respondent

60a

(11)

4. Tax consequences of Department’s action.

Each action of the Department: (1) Adding back into

apportionable income, dividends, interest, royalties, rents

and gains from the sale of properties: and (2) Com-

bining the net income of ASARCO and its six unitary

subsidiaries without regard to such add backs may be

considered separately. The following figures show:

1. Income from Montana sources as reported by

ASARCO.

2. Income from Montana sources arrived at by adding

back business income into apportionable income.

3. Income om Montana sources apportioning the com-

bined net income of ASARCO and its six unitary subsidi-

aries.

4. Income from Montana sources by apportioning the

total combined net income of the unitary corporations,

including the added back business income. As to the fol-

lowing figures demonstrate, for two of the four years

combination by itself is a tax gain to the taxpayer and

tax loss to Montana. The bulk of the tax effect of the

Department’s [12] action is in adding back into appor-

tionable income that income determined by the Depart-

ment to be business income and apportionable under its

1967 regulations. Figures for each of the years are as

follows:

1967

1. Reported income. $ 277,832

2. Adding back business income. 1,029,035

3. Combined reporting only. 265,563

4. Adding back business income and

combining. 972,092

6la

1968

1. Reported income. 6,981

2. Adding back business income. 1,176,823

3. Combined reporting only. 120,093

4. Adding back business income and

combining. 1,125,987

1969

1. Reported income. 306,064

2. Adding back business income. 1,885,233

3. Combined reporting only. 346,702

4. Adding back business income and

combining. 1,827,489

1970

1. Reported income. (2,421)

2. Adding back business income. 2,381,685

3. Combined reporting only. (125,322)

4. Adding back business income and

combining. 2,280,491

0 6 *

[48]

* * *

Section 84-1509 R. C. M., 1947 provides for consolidation

of corporations and not the combined method of reporting.

The lower court’s rejection of combination is in part on

the grounds that Section 84-1509 is the controlling statute.

The court stated that the legislature had addressed itself

to the problem ‘‘of the combining or consolidating of in-

come of affiliated corporations, and this section being the

only section in the Montana corporation license tax which

62a

deals with affiliated corporations, it is controlling.’’ (Opin-

ion, p. 15). Section 84-1509 R.C.M., 1947 deals solely with

the determination of the tax liability of the number of

corporations which are affiliated, where all of the corpora-

tions have a tax liability to the State of Montana. Other-

wise, there could be no statutory authority for the pro-

vision in that statute to apportion the liability to the re-

spective affiliated corporations. If Montana had no juris-

diction, how could the liability be enforced? In the instant

case what is being used is an accounting method to deter-

mine the tax liability of the single corporation, ASARCO.

Since the six corporations being combined with ASARCO

are not subject to the jurisdiction of Montana, in no way

could Montana constitutionally consolidate [49] ASARCO

with its wholly-owned subsidiaries under Section 84-1509

R.C.M., 1947. This, the district court did not understand. In

a consolidaticn, a portion of the income of each corporation

in the group of corporations is being taxed. In the combina-

tion, only that part of the entire net income of the group

which is attributable to the ONE corporation over which

the state has jurisdiction, is taxed. In a consolidation, the

property, payroll and sales located in Montana of each

member of the group are in the numerators of the appor-

tionment factors. In combination, the numerators are from

only one corporation. The apportionment factors in each

case include in the denominators the entire property, the

entire payroll, and the entire sales of the combined group.

Suppose that Montana wished to consolidate the net in-

come of Union Pacific Railroad Company, a holding com-

pany, and its three subsidiaries, one a railroad operation,

one an oil exploration, and one a real estate operation. If

Montana had jurisdiction to tax all three corporations, it

could consolidate the net income of all four corporations.

It would then be determining the combined income of the

consolidated group.

63a

In the instant case we are determining the income of

ASARCO, a single corporation, by apportioning the com-

bined income of it and related corporations. There is no

tax jurisdiction over the affiliates.

64a

APPENDIX F

BEFORE THE DEPARTMENT OF REVENUE

OF THE STATE OF MONTANA

In THE Marrer or THE Protest or AMERICAN SMELTING &

Rerininc Company, a New Jersey corporation.

Frotest of Proposed Deficiency Assessments Montana

Corporation License Tax—Taxable Years

1967, 1968, 1969 and 1970

Comes now American Sme.tine & Rerininc Company, a

New Jersey corporation, and for its protest of proposed

deficiency assessments of Montana Corporation License

Tax for the taxable years 1967, 1968, 1969, and 1970, states

as follows:

1. That your Protestanc, American Sme!ting & Refining

Company, hereinafter referred to as ‘‘Taxpayer’’, is a cor-

poration organized under the laws of the State of New

Jersey with its principal place of business located at 120

Broadway, New York, New York, and that it is engaged

in the business of mining, smelting, refining, manufactur-

ing, buying and selling non-ferrous metals, metaliferous

and other mineral products. That Taxpayer is engaged

in the business in the State of Montana of operating a lead

smelter in East Helena, Lewis and Clark County, and

holding currently idle minerals lands.

2. That as a corporation organized and existing under

the laws of another state and having its principal place of

business and corporate domicile outside of the State of

Montana, Taxpayer has, for many years last past, includ-

ing the taxable years 1967, 1968, 1969, and 1970, reported

its total net income from all sources within the State of

Montana and paid a percentage license fee thereon, all as

required by law.

65a

3. That Taxpayer has, as aforesaid, filed the necessary

returns for corporation license tax purposes showing its

total net income received from sources within the State of

Montana and has fully paid the tax thereon including all

tax due with respect to the years 1967, 1968, 1969, and

1970. That, notwithstanding the foregoing, the Corporation

Tax Bureau of the Department of Revenue of the State of

Montana has proposed deficiency assessments for the years

1967, 1968, 1969 and 1970 as more particularly set forth

in the letter (with attached schedules) of R. L. Kerns,

Auditor, Corporation Tax Bureau, dated March 5, 1973,

the same being hereunto attached as Exhibit ‘‘A’’ and by

this reference made a part of this Protest.

4. That as to Taxpayer, pursuant to Section 84-1503,

RCM, the Department of Revenue (and previously the

State Board of Equalization) has determined the income

accruing from sources within the Siate of Montana pursu-

ant to a formula and factors adopted by rules and regula-

tions prescribed by said state agency, and this Taxpayer

has properly reported all such income and paid the corpo-

ration license tax thereon in accordance with such rules

and regulations, formulae and factors for all years through

and including 1967, 1968, 1969 and 1970. That the proposed

deficiency assessments as contained in Exhibit A“ here-

to constitutes an illegal and unlawful departure from the

rules and regulations prescribed by the State Board of

Equalization (now the Department of Revenue) pursuant

to said Section 84-1503, RCM, and constitutes an illegal

and unlawful attempt to impose corporation license tax

upon income having no relationship to the Montana activi-

ties or the value of the privilege of doing business in Mon-

tana of and by this Taxpayer ard has no reasonable rela-

tionship to corporate activities within the State of Montana

conducted by Taxpayer; and constitutes an illegal and un-

lawful attempt to impose a corporation license tax upon

income from interest, dividends, royalties, rentals and the

sale of capital assets not arising from transactions or ac-

66a

tivities in the regular course of Taxpayer’s trade or busi-

ness or the corporate activities of Taxpayer within the

State of Montana.

5. That Taxpayer is informed and on such information

states that the proposed deficiency assessments as con-

tained in Exhibit ‘‘A’’ hereto are based upon audits,

studies, formulae and factors adopted by the Multistate

Tax Commission, which said Multistate Tax Compact is

void and illegal by reason of conflict with Article I, Sec-

tion 10, Clause 3 of the Constitution of the United States,

which provides in pertinent part that ‘‘No state shall,

without the consent of Congress, .. enter into any agree-

ment or compact with another state or with a foreign

power . .; and the Congress of the United States has

never consented to a Multistate Tax Compact. In addition,

said attempted and purported assessments of deficiency

(Exhibit A“ hereto) are illegal, as attempted to be ap-

plied to this Tapayer, for the reason that pursuant to

Article III of the Multistate Tax Compact, as adopted in

the State of Montana by Section 84-6701, by Paragraph 1

of said Article III, it is provided that the taxpayer may

elect to apportion and allocate income in the manner pro-

vided by the laws of the State of Montana or may elect to

apportion and allocate in accordance with Article IV of

said Multistate Tax Compact. That your Taxpayer has

never elected to apportion and allocate income in accord-

ance with Article IV of said Multistate Tax Compact but,

to the contrary, has elected to apportion and allocate in-

come in the manner provided by the Corporation License

Tax Act of the State of Montana, being Sections 84-1501,

et seq, RCM. ’

6. That after receipt of the deficiency assesments as con-

tained in Exhibit ‘‘A’’ hereto, the Taxpayer, acting by and

through its duly authorized attorneys, requested a copy of

the audits conducted by the Multistate Tax Commission

upon which said deficiency assessments were based, and

67a

said attorneys were informed of the existence of said

audits by Mr. R. L. Kerns, Auditor, Corporation Tax

Bureau, and Mr. Gerald L. Foster, Chief Auditor, Corpo-

ration Tax Bureau, and further informed that copies of

said audits would not be furnished to Taxpayer’s said

attorneys. That by reason of the refusal of the Corpora-

tion Tax Bureau of the Department of Revenue to furnish

said audits so made by the Multistate Tax Commission,

this Taxpayer cannot fully ascertain the manner in which

said deficiency assessments (Exhibit ‘‘A’’ hereto) were

prepared and cannot fully ascertain what items of income,

deduction, apportionment or otherwise were used in arriv-

ing at said deficiency assessments.

7. That the Corporation Tax Bureau of the Department

of Revenue, in authorizing the auditors of the Multistate

Tax Commission to act as agents of the State of Montana,

has unlawfully and illegally delegated to unauthorized per-

sons the right to make tax examinations and audits on be-

half of the State of Montana; and, further, in attempting

to assert the deficiency assessments, Exhibit ‘‘A’’ hereto,

has acted illegally and in excess of the authority granted

by the Corporation License Tax Act of the State of Mon-

tana; has attempted to act under the purported authority

of the Multistate Tax Compact (Section 84-6701, RCM)

even though Congress has not authorized said Compact;

and has attempted to force upon Taxpayer an election to

appropriate and allocate income in accordance with Article

IV of the Multistate Tax Compact even though Taxpayer

has made no such election.

8. That, asserting against this Taxpayer said deficiency

assessments (Exhibit ‘‘A’’ hereto) constitutes, as to this

Taxpayer, a denial of due process of law and of equal

protection of law in that this Taxpayer sannot ascertain

from the deficiency assessments so made (Exhibit ‘‘A’’

hereto) upon what factors, items of income, apportionment

and other matters the deficiency assessmen 4 are proposed;

68a

and that by the refusal of the Corporation Tax Bureau of

the Department of Revenue to furnish Taxpayer with a

copy of said audits this Taxpayer cannot properly pre-

pare its Protest and is thereby further denied due process

of law and equal protection of law.

9. That Taxpayer is informed and believes that by said

deficiency assessments (Exhibit ‘‘A’’ hereto) the State

of Montana is attempting, contrary to law, to classify the

Taxpayer and six other corporations, as one unitary busi-

ness for Montana Corporation License Tax purposes con-

trary to Section 84-1509, RCM.

10. That Taxpayer is informed and therefore states that

by said deficiency assessments (Exhibit A“ hereto, the

State of Montana illegally and unlawfully attempts to allo-

cate rents, royalties from real or tangible personal prop-

erty, capital gains, interest, dividends, patent or copy-

wright royalties and other income to the State of Montana

although the same does not constitute business income, did

not arise from transactions and activity in the regular

course of Taxpayer’s trade or business, and bears no rea-

sonable relationship to the corporate activities of Tax-

payer within the State of Montana or to the privilege of

doing business within the State of Montana which is the

subject of taxation under the Corporation License Tax

Act of the State of Montana.

11. That Taxpayer is informed and therefore states that

by said deficiency assessments (Exhibit ‘‘A’’ hereto) the

State of Montana has purported to apply the provisions

of Section 482, Internal Revenue Code, as to allocation of

income and deduction to the Taxpayer and certain corpo-

rations, all without authority of law.

12. That Taxpayer is informed and therefore states that

by said deficiency assessments (Exhibit ‘‘A’’ hereto) the

State of Montana has illegally and unlawfully attempted

to apply Section 78 of the Internal Revenue Code with re-

spect to dividends received by Taxpayer or other corpo-

69a

rations and to thereby include in gross income not only

the actual dividends so received but also the foreign taxes

deemed to have been paid by virtue of having received

such dividends commonly known as ‘‘Gross-up of Divi-

dends’’.

13. That Taxpayer is informed and therefore states that

by such deficiency assessments (Exhibit ‘‘A’’) there has

been an attempt to allocate to Montana, by some formula,

income or claimed income which should not properly be so

allocated and that there is no relationship between the

property, payroll and sales of the Taxpayer and the in-

come or claimed income attempted to be allocated to the

State of Montana; and that not only has there been an

attempt to allocate unitary income, but also income of a

dual or multiform nature and upon a basis which does not

recognize the actual activities in furtherance of the busi-

ness of the Taxpayer.

14. That the illegal and unlawful attempt by the Cor-

poration Tax Bureau to apportion to the State of Montana

income as aforesaid constitutes an illegal and unlawful

burden upon interstate commerce.

Wuenrerore, having protested said deficiency assessments

(Exhibit ‘‘A’’ hereto), your Taxpayer prays that the De-

partment of Revenue set aside all of such deficiencies and

interest thereon and find and determine that the Tax-

payer has properly reported for all of said years its in-

come from sources within the State of Montana and prop-

erly paid a tax thereon and that said purported and pre-

tended deficiencies are null and void,

On, In Tue Atrernattves, that the Department of Rev-

enue: (a) order the Corporation Tax Bureau to furnish

the Taxpayer with all copies of all audits and other infor-

mation upon which said deficiency assessments (Exhibit

„A“ hereto) were made, including, without limitation, all

audits and other information furnished by the Multistate

70a

Tax Commission, and (b) that thereafter the Department

of Revenue hold a hearing upon this Protest and that at

such time the Taxpayer be allowed an opportunity to pre-

sent additional evidence relating tc its tax liability.

Respectfully submitted this 4th day of April, 1973.

American Smettina & RHINO Compary,

a New Jersey corporation

Alexander J. Gillespie, Jr.

Vice President and General Counsel

120 Broadway

New York, New York 10005

Hughes, Bennett & Cain

/s/ By Gon T. Bennett

George T. Bennett

406 Fuller Avenue

Helena, Montana 59601

Attorneys for Taxpayer

Recervep and Fmezp this 4th day of April, 1973.

DepPaRTMENT OF REVENUE OF THB

State or Montana

By Board of Equal

Its Vernon Miller, Secretary

71a

APPENDIX G

IN THE SUPREME COURT OF THE STATE OF MONTANA

Cause No. 13249

Montana DepartTMEnT OF REVENUE

or THE State or Montana,

Petitioner and Appellant,

V-

Tun American SMELTING AND RETI XING Company,

Defendant and Respondent.

Respondent's Petition for Rehearing With Argument and

Authorities Integrated Therein

Comes now the Defendant and Respondent, Taz ARI.

can SmeELtTiIne anp Rermvinc Company (ASARCO), and re-

spectfully petitions the Supreme Court of the State of

Montana for rehearing pursuant to Rule 34 of the Rules of

Appellate Civil Procedure on the grounds and for the rea-

sons that the decision of this Court made and entered on

the 11th day of July, 1977 should be reversed, altered,

amended or revised, because facts material to the decision

and questions decisive of the case submitted by counsel

were overlooked by the Court and that the decision is in

conflict with express statutes and controlling decisions to

which the attention of the Court was not directed.

[Material on pp. 2-19 of original document omitted. ]

Matrer Snort Be Remanvep For ConsipERATION OF

SupstTantTiaL Constitutional Quesiions Rarsep By

Pieapines AND OveRLOOKED By tHE Court

In its Protest to the Department of Revenue, ASARCO

alleged that imposition of the asserted tax deficiency would

72a

be contrary to the Commerce Clause and Due Process

Clause of the Federal Constitution. (See Protest, pp. 2,

3, 4, 5 and 6). Because STAB and the District Court held

that the proposed assessment was not proper as a matter

of Montana statutory law, they never reached the Federal

Constitutional issues in this case. Accordingly, even if this

Court decides that the matters discussed above do not war-

rant reconsideration, the case should still be remanded to

permit full development of the facts and legal arguments

bearing on the important constitutional issues raised by

the Protest.

In particular, the case should be remanded for the fol-

lowing reasons:

1. Status of the Multistate Tax Compact: The audit

giving rise to the proposed tax adjustment in this case was

conducted by auditors of the Multistate Tax Commission,

purporting to act under the authority of the Multistate

Tax Compact. (See STAB Findings, Paragraph 6; District

Court Findings, Paragraph 6; Petitioner-Appellant’s

Brief, p.3). The validity of the Multistate Tax Compact

under the Federal Constitution is now at issue in U.S.

Steel Corp. v. Multistate Tax Commission (U.S. Sup. Ot.

Dkt. No. 76-635, October Term, 1976) which is awaiting

oral argument in the United States Supreme Court. This

is a class action by U.S. Steel on behalf of all corporations

similarly situated which would include ASARCO. The

Montana taxing authorities were expressly made a party

(J. Morley Cooper, as Chairman of the State Board of

Equalization). For this Court’s convenience, a copy of the

appellant’s brief on the merits in the U.S. Steel case is

attached as Exhibit ‘‘B’’ to this petition. If the U.S. Su-

preme Court holds that the Multistate Tax Compact is un-

constitutional, grave questions will arise as to the validity

of the audit conducted in this case by the Multistate Tax

Commission. Accordingly, final judgment should not be

entered in the present case until STAB and the court be-

73a

low have had an opportunity to consider the impact of the

U.S. Supreme Court’s decision in the pending U.S. Steel

case,

2. Taxation of Passive Income from Property Outside

Montana. Grave constitutional questions are raised by this

Court’s decision that Montana has jurisdiction to tax divi-

dends, royalties, rents, interest, and gains on stock sales

realized by ASARCO from transactions occurring wholly

outside the State. The U.S. Supreme Court has held that

the interstate operations of a foreign corporation may be

subjected to state taxation only if ‘‘the levy is not discrimi-

natory and is properly apportioned to local activities with-

in the taxing state forming sufficient nexus to support the

same’’, Northwestern Cement Co. v. Minnesota, 358 US

450, 452 (1959) (emphasis added). It is clear that ‘‘the due

process clause denies to the state power to tax or regulate

the corporation’s property and activities elsewhere’’. Con-

necticut General Life Insurance Co. u. Johnson, 303 US

77, 80-81 (1938). ‘‘ When, as in this case, there are different

taxing jurisdictions, . . . and the question is necessarily

one of apportionment, evidence may always be received to

show that a state has applied a method, which, albeit fair

on its face, operates so as to reach profits which are in no

just sense attributable to transactions within its jurisdic-

tion. Hans Rees’ Sons v. North Carolina ex rel. Mar-

well, 283 U.S. 123, 134 (1931) (emphasis added).

Applying these principles, at least two State Supreme

Courts have held that dividend income received by a cor-

poration in one state from subsidiaries operating entirely

in other states or foreign jurisdictions may not constitu-

tionally be included in the corporation’s apportionable net

income for purposes of computing its income tax liability

in the former state. Gulf Oil Corp. v. Clayton, 147 SE2

522 (Sup.Ct. N.C. 1966); Square D Company v. Kentucky

Board of Tax Appeals, 415 SW2 594 (Ct. of App. Ky.

1967). Similar considerations led Judge (later Mr. Justice)

74a

Cardozo to hold that the Federal Constitution precluded

New York from taxing a corporation doing business in

that state on any part of the interest income it earned on

bonds held outside the state. People ex rel. Alpha Portland

Cement Co. v. Knapp, 129 NE 202 (Ct. of App. N.Y. 1920).

At page 24 of the Department’s Brief, it is stated:

„Montana could not constitutionally tax ASARCO

if ASARCO did not have income from sources within

the state.“ (Emphasis supplied.)

Also at pages 48 and 49 of the Department’s brief appears

the following:

„Since the six corporations being combined with

ASARCO are not subject to the jurisdiction of Mon-

tana, in no way could Montana constitutionally con-

solidate ASARCO with its wholly-owned subsidiaries

under Section 84-1509 R.C.M., 1947.’’ (Emphasis sup-

plied.)

This Court, at page 13 of its opinion, states that the

case of Coca Cola Company v. Department of Revenue,

271 OR 517, 533 P2 788, is ‘‘on all fours with the instant

case“. This clearly indicates the Court’s misunderstanding

of this issue. In the Coca Cola case, both the parent cor-

poration and its subsidiary were doing business in Oregon,

were subject to Oregon’s jurisdiction, were deriving in-

come from Oregon sources, and, accordingly, both had

filed returns with Oregon (pp. 789 and 790 Pac.Rpts.). This

is far different from the situation with ASARCO where

the Department admits that none of the affiliated corpora-

tions are subject to the jurisdiction of the State of Mon-

tana and that ‘‘in no way could Montana constitutionally

consolidate ASARCO with its wholly-owned subsidiaries

How can this Court square its statement that:

75a

**DOR clearly has the authority to adopt rules and

regulations as to apportionment of corporate income

without regard to source. (Page 7.)

with the Department’s admission that to do so would be

unconstitutional (P. 24 of Appellant’s brief)?

While the U.S. Supreme Court has not yet passed on

the constitutionality of applying state income tax appor-

tionment statutes to passive income realized from out-of-

state property, the foregoing state decisions make it clear

that any attempt by a state to reach such income poses

serious constitutional questions, at the very least. As stated

in a recent leading article, which the Department cited

with approval in connection with another point in its brief

in this Court (p. 39):

. . . the specific allocation of investment income is

at least logically consistent with the proposition that a

state should only tax income from in-state sources.

Certainly, it would not square with the underlying

rational of the Supreme Court cases to subject such

income to formulary apportionment.’’ *

Since STAB and the District Court found it unnece

to reach this issue in their original consideration „“ ue

case, the case should be remanded and the record should

be reopened to determine whether, on the facts of this case,

the Montana statute as interpreted by this Court will re-

sult in ‘‘extra-territorial values being taxed’’. See Butler

Bros. v. McColg-m, 315 U.S. 501, 507 (1942).

3. Inclusion of Subsidiaries in the Tax Base. As inter-

preted by this Court, the Montana statute means that the

„net income and apportionment factors of six of

* Rudolph, ‘‘State Taxation of Interstate Business: The Unitary

Business Concept and Affiliated Corporate Groups’’, 25 Tax Law

Rev. 171, 185 (1970).

76a

ASARCO’s wholly owned subsidiaries must be included in

ASARCO’s computation of apportionable income,’’ even

though the six subsidiaries ‘‘are clearly separate and dis-

tinct from ASARCO”’’. (Slip Opinion, p. 11). Since the

record establishes that none of the six subsidiaries has

assets or business activities of any kind in Montana, in-

clusion of the subsidiaries’ net income in the Montana

tax base is obviously subject to serious challenge on con-

stitutional grounds. See e.g., Interstate Finance Co. v.

Wisconsin Department of Taxation, 137 NW2 28 (Sup.

Ct. Wis. 1965); People ex rel. Alpha Portland Cement Co.

v. Knapp, supra. See also, State Taxation of Interstate

Commerce, H. Rep. No. 1480, 88th Cong., 2d Sess. 245

(1964).

Those who seek to defend the constitutionality of the

result reached by this Court in the present case generally

do so by asserting that the state is not taxing the income

of the out-of-state subsidiaries, but is merely using that

income to measure the amount of tax properly payable by

the local corporation on its income. See, e.g., Keesling, ‘‘A

Current Look at the Combined Report and Uniformity

in Allocation Practices’’, 42 Journal of Taxation 106, 108

(1975). However, ‘‘[w]hen passing on the constitutionality

of a state taxing scheme, it is firmly established that

{the U.S. Supreme Court] concerns itself with the practical

operation of the tax, that is, substance rather than form’’.

American Oil Co. v. Neill, 380 U.S. 451, 455 (1965) (em-

phasis added). Regardless of how the taxing structure ap-

proved by this Court is described verbally, it can have the

practical effect of imposing tax on the out-of-state income

of separate companies having no contact of any kind with

Montana. Because STAB and the District Court concluded

that the Montana statute did not permit a combined calcn-

lation, they did not have to reach the constitutional ques-

tion. The case should therefore be remanded for a finding

as to whether or not the practical operation“ of the

77a

statute, as interpreted by this Court, is to impose a con-

stitutionally impermissible tax on the income of out-of-

state corporations which are admittedly not subject to

Montana’s taxing jurisdiction in their own right.

{Material on pp. 26-27 of original document omitted. ]

Respectfully submitted this Ist day of August, 1977.

Hucues, Bennett & Cain

Sruart L. KrLLINER

Joun F. SuLlLwax

By /s/ Georce T. Bennetr

George T. Bennett

406 Fuller Avenue

P. O. Box 1166

Helena, Montana 59601

Attorneys For American

Smelting and Refining

Company

78a

APPENDIX H

IN THE SUPREME COURT OF THE STATE OF MONTANA

Cause No. 13249

Montana DEPARTMENT OF REVENUE OF THE

Srate or Montana, Petitioner d Appellant,

-V8-

Tue American SMELTING AND Rerinine Company,

Defendant d Respondent.

Appellant's Objections To Respondent's Petition

for Rehearing

Comes Now the Petitioner and Appellant, Taz Montana

DepaRTMENT OF Revenve (Department) and objects to

American SMELTING AND Rerininc Company’s (ASARCO)

Petition for rehearing filed herein on August 1, 1977. For

convenience of the Court, the Department has followed

point by point the Petition of the Respondent, and has also

integrated as to each point raised, its argument and au-

thorities.

Petitions for rehearing are governed by Rule 34, Rules

of Appellant Civil Procedure, and the grounds upon which

rehearing petitions are granted are extremely limited.

„A petition for rehearing may be presented upon the

following grounds and none other: That some fact, ma-

terial to the decision, or some question decisive of the

case submitted by counsel, was overlooked by the

Court or that the decision is in conflict with an ex-

press statute or controlling decision to which the

attention of the Court was not directed.’’

It is on those grounds and none other upon which this

Court could order a rehearing in this matter. It is sub-

mitted by the Department, that this matter was thoroughly

79a

briefed by all parties, that the Court did not overlook any

facts or questions submitted by counsel, and that the case

is not in conflict with any statute or controlling decision.

{Material on pp. 2-12 of original document omitted.]

Issue VIII

Matrer Soul Nor Be Remanpep ror CONSIDERATION OF

SuBstTanTiaL ConsTITUTIONAL QuEsTiIoNs Raisep By

PLEADINGS AND OVERLOOKED By THE Court.

To begin with, the Department objects to the taxpayer

now requesting that additional issues should be decided

in this case which were not raised at the original hearing

before this Court. Attached as exhibit C to this objection

is the taxpayer’s proposed Findings, Conclusions and Or-

der submitted to the Department of Revenue at the initial

hearing on this matter. The taxpayer did not include any

provision in its findings or conclusions as to the constitu-

tionality of the acts of the Department of Revenue.

Also attached as Exhibit D are the Findings of Fact and

Conclusions of Law and Order entered by the State Tax

Appeal Board, which were verbatim the proposed Find-

ings of Facts and Conclusions of Law submitted by the

taxpayer, and they again do not refer to any unconstitu-

tional aspect of the case.

Finally, in the Findings of Fact, Conclusions of Law and

Order of the District Court, proposed by the taxpayer,

attached as Exhibit E which were adopted verbatim by

the Court, no where did the taxpayer raise the constitu-

tional questions it now seeks to interpose. The taxpayer

was not precluded at any stage from the hearing before

the Department of Revenue to the hearing in the District

Court, from raising the constitutional questions. The tax-

payer did not raise those issues at any stage in the pro-

ceedings, and clearly did not raise those issues before this

Court. This Court has repeatedly stated that it will not on

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a motion for rehearing consider questions not originally

raised in the action. Mares vs Mares et al, 60 M.36, 199P.

267.

„However, this is the first time that this point has

been presented, urged or argued, and it is the settled

rule that this Court will not, on an application for

rehearing, consider grounds for reversal not presented

upon the original hearing.’’ P. 55

It is the position of the Department, that even if these

matters had been raised previously, which we contend they

were not, they were clearly not raised in the original hear-

ing in this Court on this matter and cannot now be raised

by the taxpayer.

Sub-Section 1

Status of the Multi-State Tax Compact

The taxpayer asserts that because the audit was per-

formed by the Multi-State Tax Commission, and the va-

lidity of the compact is at issue in the United States Su-

preme Court, that it effects the decision in some way. In

opposition, we cite to the Court the brief of the taxpayer

filed in opposition to the motion of the Multi-State Tax

Commission to participate in this matter as amicus curiae,

dated May 12, 1976. In that brief, the taxpayer takes a

somewhat different position.

„It is true that the audit which formed this basis of

this litigation was conducted by the Multi-State Tax

Commission. But this act has no bearing whatsoever on

the issue on appeal herein. There never was any ques-

tion in this case as to the audit information. Thus, the

issue on appeal does not relate to the validity of the

mechanics of the audit. Rather, the issue on the De-

partment’s appeal concerns the time at which the

principals of UDITPA became effective in Montana.

This issue, ASARCO submits, is solely and exclusively

8la

one of Montana law, in which the Multi-State Tax

Commission has not one bit of interest with respect

to which there is no need whatsoever to ‘uniform in-

terpretation and application by the member states’ of

— Multi-State Tax Commission.“ (Emphasis sup-

plied)

The Department could not have have rebutted the argo

ment any better than the taxpayer has.

Sub-Section 2

Taxation of Passive Income from Property Outside

Montana

The Respondent begins this argument with the following

statement:

„Grave constitutional questions are raised by this

Court’s decision that Montana has jurisdiction to tax

dividends, royalties, rents, interest and gains on stock

sales realized by ASARCO from transactions occurr-

ing wholly outside the state.’’ p. 21.

These grave constitutional questions have never been pre-

sented to this Court prior to this petition for hearing. If

this had been a consideration of the taxpayer, these cases

could have been briefed and argued prior to this late date.

As the Mares case supra indicates, it is not proper in a

petition for rehearing to raise new issues.

On page 23 of the Respondent’s petition, beginning at

line 13, it is again clear the taxpayer’s misunderstanding

of the issue of combination. The Court was quite correct in

ruling that the case of Coca-Cola Co. vs. Department of

Revenue, 271 OR 517, 533 P.2d 788, is on all fours with the

instant case. The question there involved the unitary op-

eration of Coca-Cola and its subsidiaries. The situation

is exactly the same with the taxpayer and the subsidiaries

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which were combined, because they were conducting a uni-

tary operation.

Finally, it is incorrect for the taxpayer to indicate that

STAB and the District Court found it unnecessary to

reach these new constitutional issues, because the fact

simply is, that the issues were in fact never presented to

those tribunals for their decision. More importantly, they

were not presented to this Court by the taxpayer, prior to

this time.

Sub-Section 3

Inclusion of Subsidiaries in the Tax Base

Sub-Section 3 is a rehash of sub-section 2 of this issue.

The taxpayer has not cited any case whereby the acts of

the Department as upheld by this Court are unconstitu-

tional. Rather the taxpayer is asking this Court to give

them another opportunity to reargue their case on different

grounds. The Department contends that these issues were

not raised before STAB or the District Court and there-

fore the case cannot now be remanded for a determination

of these new issues.

[Material on pp. 15-16 of original document omitted. ]

ConcLusIon

A careful review of the petition, clearly indicates that the

taxpayer has not raised any issue which comes within the

parameter of Rule 34 Montana Rules of Appellate Proce-

dure. Of the first eight issues, if they were raised they

were discussed by the parties in the briefs and by this

Court in the opinion, and are laid to rest; if they were not

raised, they cannot be argued now. Of the constitutional

issues, these were not raised in the prior proceedings;

they were clearly not raised in the original hearing before

this Court; the taxpayer had every opportunity to argue at

the prior stages the constitutional question, and failed to

do so. It is improper at this stage of the proceedings to

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grant a rehearing to hear issues not previously raised.

Finally, the Court’s opinion did not overlook any issues

raised; the deficiency assessment will not include any

amount represented by ‘‘gross up’’; the question of the

gain on the sale of stock of General Cable and Revere

Copper was clearly considered by the Court and found to

be business income.

THEREFORE, the Department respectfully requests that

the petition of the Respondent for rehearing be denied on

all grounds.

Dartep this 4th day of August, 1977.

Respectfully submitted,

Terry B. Coscrove

Tueopore B. peLooze

/s/ Terry B. Coscrove

Special Assistant Attorney

General

P. O. Box 1144

Helena, Montana 59601

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.