Appendix — Exxon Corp. v. Department of Revenue of Wis.

*~ 4 ote. > ey 7 a > Lie

PO Be mmm Cone Th PLP

am iy 4 ‘ ‘ .

4

APPENDIX (VOL. I) fF SAR © 1980

== . | ji

eet 2 , |

Iu the

Supreme Court of the United States

Ocroper Term, 1979

No. 79-509

EXXON CORPORATION,

Appellant,

vs.

WISCONSIN DEPARTMENT OF REVENUE,

Appellee.

On Appeal From the Supreme Court of Wisconsin

a iain

UNITED STATES LAW PRINTING CO., CHICAGO, ILLINOIS 60618 (312) 525-6581

Jurisdictional Statement Filed September 26, 1979

Probable Jurisdiction Noted November 26, 1979

Volume I—Pages A. 1 to A. 600

INDEX

APPENDIX

VOL. I PAGE

Transcript of Proceedings _ ...............--.-.--- A. 1-A. 600

VOL. Il

TEE 2 one eee A. 601

WTI a icicseccaiicseniosicinsttacatonictcanianscticannmnenmtie A. 627

WE DEG B, | rvsccicccsscnricteicsceccsinenicteni Biers A. 636

| | ab & ) An ree nnenanmaen aren Tene A. 661

TE BEF vicssscensvvesitce neice etnioeans A. 675

RE TIA cece A. 693

Exhibit 11-11 (without exhibits) —........................ A. 720

WE FI saan seessssnssnssasguepncecivinnctenhectnterh oliochesistamaa A. 744

| _* Evan nPE DIN serena om mmernvewnhUnsne< Pal)sr A. 751

ee TD ak. eeee A. 752

I BI i cncestmsnessinsessccnrntnrsstiecsancmacaminnannnneaieaaiata A. 753

|_| Sane eae enone Ennis e nom umeut or? A. 754

TE annie sccsctceeererctetsiesnecstlimapnanein A. 755

TIE BU. Sisccscesncecasintnsvicmcenianinnsmadanatbncnvatel A. 756

I TE wisciisecsintinccceneinigeemnitcnneniiannenaaiouned A. 757

NE FE iii ainicieeiteindmmaiaunia A. 758

TI FD nsichscse vie vnncnsessstestiiienetintaienintinnannaieaagan A. 759

BE BOO > aecsincssnsnsishsxevioncenisiinsetenspenaaniatlaainice Damiana A. 786

TE TR ccietheicncncrenccihacincccocciecasnueareinheaemainmahaas A. 791

TNE OP) tiitcctenininienceiennieenmonnets A. 799

li

The following decisions, statutory references, peti-

tion and exhibit have been omitted in printing this

appendix because they appear on the following pages Iu the

in the appendix to the printed Jurisdictional State-

ment: Supreme Court of the United States

PAGE

s , / OcroserR TERM, 1979

Decision Of Wisconsin Supreme Court. ......... ..App. 1

Judgment And Memorandum Decision Of Cir-

COUN CE Sisicccccincchcrvcieceeninetneciancalantindiminmnaneaaaas App. 34 No. 79-509

Decision, Findings Of Fact And Conclusions Of

Law Of Wisconsin Tax Appeals Commission ....App. 66 EXXON CORPORATION,

. Appellant,

Whe: Btat. STRGTE) . nena App. 80

Wis: Stat. LT) App. 80 ba

Petition For Review EEE NOON SEO I App. 81 WISCONSIN DEPARTMENT OF REVENUE,

Appellee.

Exhibit 29 .............. <iisisiainisnuintecciaiepiapiancg aiid App. 87

On Appeal F'rom the Supreme Court of Wisconsin

APPENDIX (VOL. I)

APPENDIZ

WISCONSIN TAX

STATE OF WISCONSIN APPEALS COMMISSION

EXXON CORPORATION, (f/k/a Humble

Oil and Refining Company),

Petitioner,

- VS - Docket No. I-3806

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

Transcript of Proceedings in the above-entitled matter

held before the Wisconsin Tax Appeals Commission, in

Room 229, City-County Building, Madison, Wisconsin, on

the 2nd day of October, 1974, commencing at 10:20 in the

forenoon.

Presiding: R. J. Smrz, Chairman

Thomas R. Timken, Member

John P. Morris, Member

Also Present: Jay C. Gitchell, Hearing Examiner

A. 2

APPEARANCES

Boardman, Suhr, Curry & Field, Attorneys at Law,

131 West Wilson Street, Madison, Wisconsin, by

Thomas G. Ragatz,

and

McBride, Baker, Wienke & Schloss.:, Attorneys at Law,

110 North Wacker Drive, Chicago, Illinois, by Lloyd M.

McBride and Paul D. Frenz,

and

Robert E. Tannehill, Tax Attorney, Exxon Company,

Houston, Texas, appearing on behalf of Petitioner.

Irving F’, Shapiro and Robert M. Finley, Tax Counsel,

Wisconsin Department of Revenue, 201 East Washington

Avenue, Madison, Wisconsin, appearing on behalf of

Respondent.

Mr. Timken: We will call for a hearing in the matter

of Exxon Corporation, Petitioner, versus Wisconsin De-

partment of Revenue, Respondent, Docket I-3806.

Will you give the appearances, please?

Mr. Ragatz: For the petitioner, Attorney Thomas G.

Ragatz of Boardman, Suhr, Curry and Field in Madison.

Also appearing for the petitioner are Attorneys Lloyd Mc-

Bride and Paul F'renz of McBride, Baker, Wienke & Schlos-

ser from Chicago, and Attorney Robert Tannehill of Exxon,

Houston, Texas.

Mr. Shapiro: For the respondent, Irving F. Shapiro

and Robert M. Finley.

Mr. Timken: You may proceed, Mr. Shapiro. Mr. Ra-

gatz, do we have a corporate officer present or has that been

waived?

Mr. Ragatz: I believe at pretrial I advised the Com-

mission and the counsel for the Department that we would

have a corporate officer here tomorrow, and counsel for

Fn —

A. 3

the Department indicated that they would not object to

that procedure. He will be here to testify and he will be

available for cross-examination.

Mr. Timken: Very well. Mr. Shapiro, you may proceed.

Mr. Shapiro: Sir, the usual practice of the Commission

is to have the respondent offer the so-called jurisdictional

exhibits at this time, and following that the petitioner pro-

ceeds with its case. Since the jurisdictional exhibits have

been incorporated into the documents that have been stipu-

lated to, I am requesting—and the stipulation has been

entered into the record as Exhibit 15, I am wondering

whether it is appropriate for the respondent to proceed any

further at this time.

Mr. Timken: Mr. Ragatz, would you like to proceed?

Mr. Ragatz: As counsel for respondent has indicated,

we have stipulated to the admission of, I believe it is now

15 categories of documents, one category having about an-

other 15 sub-numbers, so there are approximately 30 docu-

ments that are already stipulated in, well, many more docu-

ments because there are working papers and very numer-

ous documents in there and they are entered as one exhibit.

It might be worthwhile for us to read in at least the

factual parts of the stipulation at this time before I pro-

ceed with the opening statement just to give you a little

factual background and to accomplish what we hope would

be a saving of time by preparing this stipulation.

I may say initially that the documents we have stipu-

lated into evidence per the stipulation shall be stipulated

into evidence in this action and made part of the record

for purposes of all hearings, trials and appeals in this

cause, to provide undisputed evidence of the authenticity,

existence and contents of such documents with the reserva-

tion that each party reserves the right to argue the rele-

vance of any data contained in the documents, and I am

assuming such arguments would be made in brief after the

hearing and would not take up the time now.

A. 4

As I say, we have enumerated roughly 30 documents, and

pursuant to the stipulation I would like to move the admis-

sion of these documents set forth in the stipulation and

the stipulation itself into evidence at this time to be formal-

ly made part of the record.

Mr. Timken: Do we have that stipulation before us?

Mr. Shapiro, any objection?

Mr. Shapiro: No objection.

Mr. Timken: Very well, the stipulation is accepted and

the exhibits contained therein are accepted and received

into the record.

Mr. Ragatz: In connection with the stipulation I would

further note that the exhibits numbered 7, 8, 9 and 10 con-

stitute the discovery transcripts of four employees of the

Department of Revenue, and you will recall that the Com-

mission granted the petitioner discovery authority and that

we took these depositions back in January. Now to save

time at this proceeding, we have agreed with counsel for

the Department of Revenue that these discovery transcripts

would be as exhibits and part of the record and that the

testimony given therein is part of the record for purposes

of this case.

Now because of this we can avoid covering a lot of ground

the second time. However, for the Commission to get the

full understanding of the evidence, you will have to exam-

ine those exhibits, and we will highlight at least some of

that testimony to try to give you continuity to the picture

as we present the case.

Now I would like to read for the record the facts that

have been stipulated and the basis of this stipulation is

that counsel have agreed for purposes of this action only

to the truth of the following facts and to the admissibility

of this stipulation into evidence in this action for use in all

the hearings, trials and appeals in this case, for the pur-

pose of providing undisputed evidence of such facts.

A. 5

(1.) Petitioner timely filed its Wisconsin corporation

income and franchise tax returns for the calendar tax years

of 1965 to 1968, both inclusive. The returns were prepared

and the computations made on the separate accounting

method. Losses were shown in the amounts of $821,320;

$1,159,830; $1,026,224; and $919,575, respectively, for the

years 1965, 1966, 1967 and 1968, aggregating $3,926,949 for

the four year period. No tax was shown as being due for

any such year.

(2.) Under date of June 25, 1971, C. J. Hoel, Section

Chief of the Respondent, forwarded to Petitioner a Notice

of Assessment of Additional Income and Franchise Tax

(Exhibit 1), to which there was appended the Franchise

Tax Audit Report (the ‘‘ Audit Report’’) of Mr. Thomas

J. Sheridan dated May 1, 1971, in which he found that Peti-

tioner’s income was subject to apportionment, which sub-

jected it to tax on or measured by additional income of

$4,532,155 for the period 1965 through 1968. Additional

taxes in the amount of $316,470.85 were thereby assessed

against Petitioner. These documents were received by Peti-

tioner on June 28, 1971.

(3.) Under date of July 21, 1971, Petitioner timely filed

an Application for Abatement (Exhibit 3). On October 26,

1971, an informal conference was held on the Application

in the offices of the Respondent at Madison, Wisconsin.

(4.) Under date of November 30, 1971, C. J. Hoel, for-

warded to Petitioner a Notice of Denial of Application for

Abatement (Exhibit 4), to which there was appended a

Notice of Additional Taxes Due, dated November 30, 1971,

in the principal amount of $316,470.85, plus interest.

(5.) On December 20, 1971, Petitioner timely filed a

Petition for Review by the Commission (Exhibit 5), and

subsequently Respondent timely served and filed its An-

swer (Exhibit 6).

A. 6

(6.) Petitioner subsequently made an application for

discovery anthorization, which the Commission granted on

May 26, 1973; and the discovery examinations of four em-

ployzes of the Respondent were conducted on January 15

and 16, 1974 and the transcripts of such examinations were

Exhibits 7 through 10 herein. Pursuant to a Subpoena

Duces Tecum served upon Respondent by stipulation with

its counsel, Respondent produced the documents sub-num-

bered under Exhibit 11 herein and others, indicating that

such documents constitute all documents known to Respon-

dent covered by the enumerated categories in the Subpoena

and pertinent to the audit and assessment of the Petitioner

for the 1965-1968 period of the audit in issue and for the

1960-1964 period of the prior audit, with the exception of

documents referred to as the ‘‘Continental Oil Co. work

papers’’ which were used as a model for the audit of the

Petitioner but which Respondent refused to produce and

which refusal was upheld by the Commission.

(7.) Respondent had also audited the Petitioner for the

period 1960 through 1964, which audit was conducted for

Respondent by Kurt Kaspar, Jr. The Notice of Assessment

and Audit Report for that period is Exhibit 2 herein.

(8.) Petitioner Exxon Corporation (hereinafter ‘‘Ex-

xon’’) was formerly named Standard Oil Company of New

Jersey (hereinafter ‘‘SONJ’’) which prior to the name

change in early 1973 was the owner of a wholly owned

subsidiary corporation named Humble Oil & Refining Com-

pany (hereinafter referred to as ‘‘Humble’’). At about

the time of the name change Humble was merged into Ex-

xon, making Exxon the legal successor to the original Peti-

tioner in this action.

(9.) In 1956 SONJ organized as a wholly owned sub-

sidiary a Delaware corporation named Pate Oil Company,

which then acquired all of the assets and liabilities of

Saxon Corporation, a Wisconsin corporation whose name

A.7

had just been changed from Pate Oil Company. The new

Pate Oil Company continued the operations of the former

company under the name ‘‘Pate,’’ which operations were

all located in Wisconsin and consisted of the marketing of

petroleum products and accessory products. Corporate in-

come tax reporting to the State of Wisconsin was done on

the basis of the results of the new corporation’s Wisconsin

marketing operations, which continued the pattern of the

former Pate corporation in reporting all of its income to

Wisconsin.

(10.) On June 30, 1960 SONJ caused (new) Pate to be

merged into Humble, and thereafter the Wisconsin market-

ing operations were continued by Humble with the brand

name being changed to ‘‘Enco.’’ In early 1973 Humble

was merged into SONJ and the latter’s name changed to

Exxon. Petitioner will be referred to in this case as either

‘*H}xxon’’ or ‘‘Humble,’’ and such references are intended,

unless otherwise specified, to refer to the legal entity which

conducted the Wisconsin operations, named Humble Oil &

Refining Company, to which Mxxon is now the legal suc-

cessor.

That concludes the stipulation. And now, unless you

would like something different, I will proceed with the

opening statement.

Mr. Timken: You may proceed.

Mr. Ragatz: May it please the Commission: we are

here today to present the case of petitioner, Exxon Corpo-

ration, in connection with its petition requesting reversal

of the Wisconsin Department of Revenue’s denial of an

application for abatement of corporate franchise taxes as-

sessed for the years 1965 through 1968.

Initially, I would like to point out as the stipulation al-

ready does that the name of the petitioner during the years

in issue was Humble Oil and Refining Company and that

we will undoubtedly, through our witnesses, be referring

A. 8

to the petitioner on occasion by Exxon, but most of the

time by the name of Humble. But these are one and the

same entity in that Exxon is the legal successor by merger

to Humble.

And, incidentally, one of the jurisdictional exhibits re-

lating to the petition is amedment to the original petition

changing the name from Humble to Exxon.

Now during the years in issue Humble was engaged in

the major domestic operations of exploring for, producing,

refining, transporting and marketing oil and gas and re-

lated petroleum products. Because of legal reasons it

operated these service stations all over the country under

various names. In Wisconsin the brand name used was

‘*Kinco’’ and in fact that same brand name is still in use

here in Wisconsin today despite the fact that the Exxon

brand name has been implemented elsewhere.

For reasons related to the facts here in issue, Exxon has

not seen fit to change the name of its Wisconsin operations.

One of the witnesses will elaborate on this further.

The evidence will show that Humble was organized on

a functionally independent basis, and that its separate

functions were operated as separate businesses in competi-

tion with other oil companies have similar functions and

other companies which only operated in the business activ-

ity of a particular function.

We intend to develop through the evidence the functional

independence of the various departments, and we ask the

Commission to pay particular attention to this aspect of

the case.

The key functional departments which will be discussed

in evidence are Exploration and Production, frequently re-

ferred to as E and P, the refining function and the market-

ing function. Now while there are other functional depart-

ments such as marine, land management, minerals and coal

and shale oil, the results of the operations by these depart-

A. 9

ments are largely situs oriented and although respondent

included them for the most part in apportionable income

on its audit, we believe that at least since the discovery

examination it should recognize that the income of such

functional departments is properly allocable to situs.

For purposes of this hearing we will concentrate on the

functional operation of the three major functional depart-

ments, that is, exploration and production, refining, and

marketing.

The evidence will disclose that Humble conducted no ex-

ploration or production activities of any nature in Wis-

consin, and that no refining activities were conducted in

Wisconsin either. In fact, the only activities in which the

petitioner was engaged in Wisconsin during the years in

issue, and since, was a relatively small amount of market-

ing. The marketing operations in Wisconsin are a carry-

over of the Pate Oil Company which Standard Oil of New

Jersey acquired in 1956 and operated as a separate corpo-

ration until 1960. Pate was an independent marketer, and

after the merger of Pate into Humble in 1960 Humble con-

tinued the same Wisconsin marketing operations, which

Pate had been conducting.

Humble has always reported for Wisconsin income tax

purposes on the basis of separate accounting, and during

the years in issue it showed substantial losses arising from

its Wisconsin marketing operations. Such losses aggre-

gated over $3,900,000 during the years in issue. The re-

spondent, however, employed a hybrid version of the statu-

tory apportionment formula, and reached the conclusion

that the petitioner had substantial taxable income during

each of the years of issue. Such taxable income totaled

over $4,500,000 for the four years, which figure we think

the Commission should particularly note because it is ap-

proximately $8,460,000 higher than the results shown by

the petitioner’s separate accounting. This very significant

A. 10

difference is important not only because of the dollar im-

pact on the petitioner, which we submit is way out of pro-

portion to its marketing activities within this state, but

also because it represents a drastically different result

than the respondent could conceivably justify on any as-

sessment based upon the principles of separate accounting.

Therefore, it is our position that by use of the appor-

tionment formula respondent is attempting to reach and

subject to Wisconsin tax income from non-Wisconsin inde-

pendent functional operations which have no rational con-

nection or nexus to petitioner’s activities in the State of

Wisconsin, principally exploration and production income.

We contend that such treatment constitutes both a vio-

lation of due process and a burden on interstate commerce.

In addition, respondent has attempted to reach even further

by aborting the statutory formula to drag in even more

income to subject to tax. This aborted formula will be re-

ferred to by the petitioner as a ‘‘hybrid formula,’’ and we.

contend that this hybrid constitutes an extension of the

‘over reach’”’ of the apportionment formula itself. Fur-

thermore, we feel the evidence will also show that the re-_

spondent’s application of the apportionment formula sub-

jects the petitioner to the risk of multiple state taxation ;

and we contend that this risk of multiple taxation is not

only burdensome to the petitioner, but that it constitutes

a constitutionally impermissible burden on interstate com-

merce in violation of the commerce clause of the United

States Constitution.

Our evidence in connection with petitioner’s exploration

and production function will demonstrate that it is organ-

ized and run as a separate business, and that the petition-

er’s corporate policy of functional profitability indepen-

dence is carried out by the sale of a substantial portion of

the crude oil to third parties at third party prices known

as ‘‘posted field prices,’’ and by the transfer of other crude

A. 11

to the petitioner’s refining department also at the posted

field prices.

The use of such prices for crude oil and similarly deter-

mined prices for natural gas, which prices are determined

in each field in relation to arms length conditions, and

which the evidence will show are recognized as third party

prices, establishes the integrity of the internal accounting

for the net income of the exploration and production func-

tion; and the respondent has recognized the integrity of

this net income determination in its own unpublished poli-

cies disclosed on discovery, and also has recognized this

integrity by utilizing Humble’s exploration and production

net income figure as one of the base figures in its calcula-

tion of the portion of petitioner’s exploration and produc-

tion income which respondent deems apportionable.

The same functional profitability independence policy

applies to the refining function, in that it acquires crude

from outsiders and from petitioner’s exploration and pro-.

duction function at posted field prices, and it sells and

transfers the refined product to third parties at negotiated

arm’s length prices, and to petitioner’s marketing depart-

ment at such third party prices determined in relation to

those published in the accepted industry publication known

as Platt’s Oilgram.

Because of the integrity of the internal accounting for

functional profits, the fact that each function stands alone

and deals with other functions on the same basis as it deals

with third parties, and the highly significant fact that no

oil or gas from petitioner’s exploration and production

function comes into the State of Wisconsin to be sold as

fuel oil, heating oil or gasoline, it should be clear that peti-

tioner’s refining and exploration and production functions

are not integral parts of petitioner’s marketing operations

in Wisconsin.

A. 12

On this factual background it should be clear that the

.tespondent cannot by apportionment pull into Wisconsin

for tax purposes a portion of petitioner’s exploration and

production or refining net income, thus creating Wisconsin

taxable income way out of proportion to the possible profit-

ability results of Wisconsin marketing operations. An

authorization to use the apportionment method certainly

cannot be taken as a blank check to pull in and tax income

that has no relationship to the taxing state.

Respondent contends that its use of apportionment is

authorized by Section 71.07 (1) of the Statutes. The audit

Jetter which accompanied the assessment in issue states

the conclusion that petitioner ‘‘is an integrated oil com-

pany’’ and that since petitioner ‘‘is a unitary company

and its Wisconsin business is an integral part thereof,

formula apportionment of the company’s income is manda-

tory and separate accounting is not permissible.’’

The evidence will demonstrate, however, just as the dis-

covery proceeding has already demonstrated, that the re-

spondent’s audit made no real attempt to determine wheth-

er or not petitioner’s business was unitary or whether its

Wisconsin business was an integral part of a unitary busi-

ness. Respondent’s definition of ‘‘unitary,’’ as expressed

in its unpublished policy papers, and on discovery by its

personnel involved with the audits of petitioner, demon-

strate that respondent would treat any corporation with

multi-state operations as a unitary business. Respondent’s

record would indicate that this is the interpretation it

follows.

We submit, and suggest that the evidence will demon-

strate, that the definitions used are so imprecise as to be

of no value; and that respondent’s over reaching interpre-

tation does not conform to the language of the statute. The

requirement that the business done in Wisconsin must be

an integral part of a unitary business obviously does not

A. 13

apply where a taxpayer has separate functionally inde-

pendent out-of-state busineses which are neither necessary

to nor dependent upon the Wisconsin operations.

Our evidence will show that none of petitioner’s func-

tional departments are integral parts of a unitary business

composed of all functions combined; rather it will show

that each function is independent and not unitary to or an

integral part of any other function.

Respondent’s deficiency assessment included approxi-

mately 40% of the exploration and production department

income in apportionable income by the use of a barrel

formula as part of the hybrid apportionment formula.

Thus, it treated approximately 60% of the production in-

come as allocable to the situs of the producing states. We

contend that 100% should have been so allocated, or treated

as income from an out-of-state business, so that no portion

of income from the exploration and production business is

includable in Wisconsin apportionable income, and that to

include any portion would be in violation of the due process

and commerce clauses of the U.S. Constitution.

Apportionment certainly is not a blank check authorizing

the taxation of income that has no rational relationship to

Wisconsin.

We contend that Section 71.07 of the Statutes limits the

imposition of the tax in the case of corporations deriving

income from within and without Wisconsin, so that only

income from business transacted and property located with-

in the State can be taxed.

We contend that the proper construction of this statute

requires that each activity of the petitioner which is of

substantial separateness from each other activity, must be

regarded as a business, and that the statute must be ap-

plied to each such business separately. As already men-

tioned, the only business conducted within the State was

marketing, and to include any part of the income derived

A. 14

from production business and properties in apportionable

income would be to unconstitutionally tax extraterritorial

income. If Section 71.07 were construed so as to tax such

income, it would clearly be unconstitutional, and the appli-

cation of the presumption of constitutionality dictates that

such a construction should not be adopted.

The exploration and production function, we contend, is

not only a separate business which is not an integral part

of the marketing activities of the petitioner in Wisconsin,

but all its income is also properly classifiable as income

allocable to situs from the operation of a mine or quarry

within the meaning of Section 71.07 (1), which has been

consistently construed by the respondent to include oil and

gas income in the category of income from mining.

Since the statute requires the allocation of situs income

before an apportionment formula can be utilized, and since

the separately determined Exploration & Production funce-

tion income constitutes income from a situs operation,

whether or not the crude and gas is transferred to Peti-

tioner’s Refining function, we contend that the proper con-

struction of the statute would be to in any event allocate

all Exploration & Production income to situs.

Since there is no ‘‘integral’’ relationship between Peti-

tioner’s Exploration & Production function and its busi-

ness in the State of Wisconsin, or between its Refining

function and its business in the State of Wisconsin, the

only possible question is whether there may be an integral

relationship between the Petitioner’s marketing function

and its activities in the State of Wisconsin. While we ac-

knowledge that this may be a closer question, we believe

that the acquisition of third party product at industry

prices determined in relation to Platt’s Oilgram, the con-

duct of the Wisconsin marketing operations from a district

office in Milwaukee, and the pattern whereby the Wiscon-

sin marketing was the mere continuation of the business

A. 15

of a separate corporation which originally did business as

Pate Oil Company before the business was acquired, should

support the conclusion that Wisconsin operations were not

even an integral part of the Petitioner’s Marketing func-

tion.

This leaves the question as to whether petitioner’s sepa-

rate accounting for Wisconsin marketing operations fairly

reflects the results of its operations in this State. Respon-

dent’s auditors have already admitted under oath on the

discovery proceeding that they have no basis to challenge

Petitioner’s separate accounting reporting of Wisconsin

sales and of the related Wisconsin cost of sales; and that

only a few operating expenses might be questioned as pos-

sibly relating to more than mere Wisconsin activities, al-

though it was pointed out that even to reduce such expenses

in half would not put the petitioner in a profit position in

Wisconsin during any of the years in issue. Thus, we sub-

mit that the evidence will demonstrate that even giving re-

spondent the benefit of the doubt on such expenses, a sepa-

rate accounting calculation will not generate one cent of

taxable income in Wisconsin during the years in issue.

As the Commission may recall from our Application for

Discovery Authority, there are other deficiencies in the re-

spondent’s case relating to its use of a hybrid method em-

ploying a weighing factor not authorized by the statute,

which permits use of other than the three factor statutory

formula only when rules and regulations are prescribed as

to such a hybrid method. No such rules have been pre-

scribed. We intend to concentrate our efforts during the

hearing on demonstrating the incorrectness of Respon-

dent’s position in denying use ef separate accounting and

requiring apportionment which subjects to Wisconsin taxa-

tion petitioner’s refining and exploration & production

functions. It is our intention, however, to preserve the

question of whether respondent can refuse to make avail-

A. 16

able the working papers it admittedly used as a model for

the audit of the petitioner, having admittedly not pre-

scribed and published any rules and regulations explaining

its method; and to preserve the equal protection question

as to whether the respondent must respond to inquiry as

to whether other oil companies are being afforded the same

or similar treatment, and allowing the petitioner to exam-

ine departmental witnesses on apparent inconsistencies in

filed cases with other oil companies. In determining to con-

centrate during the hearing on the constitutional and statu-

tory issues raised, petitioner has determined, despite the

considerable complexity of respondent’s apportionment

calculations, and the possible deficiencies in the mechanics

of such calculations, that it will not take the Commission’s

time to explore in depth the mechanics of the calculation;

but rather after demonstrating certain arbitrary and erro-

neous assumptions used, we will concentrate on the issue

of whether the apportionment method can be applied gen-

erally to petitioner’s overall operations.

We will present as an exhibit a calculation showing pos-

sible Wisconsin taxable income or loss under certain pos-

sible alternative conclusions, which include: (1) separate

accounting for Wisconsin marketing operations, (2) ap-

portioning and taxing only petitioner’s marketing function,

(3) apportioning and taxing only petitioner’s marketing

and refining functions, and (4) treating petitioner’s explo-

ration & production function as a separate non-Wisconsin

business or as income allocable to situs.

Before closing I want to highlight for the Commission

what we view to be the overriding issues for determination:

Ist. Does Section 71.07 of the Statutes permit the re-

spondent to refuse to accept the petitioner’s unchallenged

separate accounting results for its Wisconsin operations,

and impose upon it the apportionment method as to some

or all its income from functionally independent depart-

A. 17

ments? That is, are some or all of petitioner’s functional

departments unitary business and are its Wisconsin mar-

keting functions an integral part of any such unitary

business?

2nd. Even if the respondent is deemed authorized to

use the apportionment method, can it be applied to opera-

tions which are functionally independent or to income which

is clearly derived from situs operations, both of which have

no connection to Wisconsin marketing operations.

3rd. Does an authorization to use apportionment allow

the respondent to apply it in such a manner as to subject

millions of dollars to Wisconsin taxation that have no ra-

tionale relationship to the marketing operations in this

State and are way out of proportion to any possible profit

potential of this Wisconsin marketing business?

Because of the precedential importance of the issues in

this case, and the legal and factual complexity, I strongly

urge each member of the Commission to make every effort

to be present at all session of this hearing. In order to

properly assimilate the evidence we submit, it will be very

helpful to hear all of it in logical sequence and to examine

the exhibits. We will be presenting significant constitu-

tional issues for the Commission’s determination, and I

submit that the Commission will not be able to adequately

decide this case without coming to grips with these con-

stitutional issues. I urge the Commission not to duck these

issues, and to accept the responsibility vested in it by mak-

ing decisions on the constitutional questions. Otherwise

the outcome will not be meaningful for either the petitioner

or the respondent as to the basic issues.

Because of the complexity of this case I have dealt at

some length in this opening statement, with both the factual

background and with an identification of the issues and

theories to be presented by the petitioner, in the hope that

it will help the Commission to more quickly grasp the key

A. 18

aspects of the evidence to be presented, and will give it a

better initial perspective to view the serious constitutional

issues.

Closing, I would like to say that the facts which we will

present in our view will present a classic case of ‘‘over

reach’’ and I trust that after you have assimilated the

factual situation and reviewed the law, you will agree that

the State’s assessment and procedures have far exceeded

the bounds of fair play and substantial justice required by

the constitution.

Thank you.

Mr. Timken: Back on the record.

Mr. Shapiro, you may respond.

Mr. Shapiro: May it please the Commission, respon-

dent prefers not to deal at length in its remarks by way

of opening statement, but to reserve for the judgment of

this Commission that it views all of the evidence, and I

underscore the word ‘‘evidence’’ produced in the course of

the hearing and that it considers the arguments made in

brief by counsel for the parties after all of the evidence

is in.

The basic question in this case is whether the operations

of Humble within and without Wisconsin during the years

1965 through 1968 were unitary.

It is our contention that they were unitary under the

established meaning of that term as used in the field of

franchise and income taxation, and that accordingly, the

petitioner was required to report its income to Wisconsin

pursuant to the statutory apportionment method as pre-

scribed by Section 71.07 (2) of the Statute and as amended

by Chapter 171 of the Laws of 1949.

The franchise and income tax assessment of which the

petitioner complains in this appeal resulted primarily from

the fact that the respondent disallowed the petitioner’s

separate accounting for Wisconsin income and determined

A. 19

Wisconsin’s income by the apportionment method. The re-

spondent has treated income derived from the sales of the

company’s produced crude oil to outsiders as nonapportion-

able or nontaxable income.

This income is excluded from the apportionment formula.

This exclusion of income, we submit, is based upon the pro

visions of Section 71.07 (1) relating to income from the

operation of a farm, mine or quarry, to the extent that the

company’s crude oil was refined and marketed by the com-

pany by virtue of exchange agreements or otherwise, the

respondent included the income therefrom in the statutory

apportionment formula applicable to a unitary business.

When it filed its Wisconsin franchise and income tax

return, the petitioner reported net losses for each of the

years in question. However, it earned net profit of $2,-

200,000,000 from its total company operations during the

audit period as disclosed in the returns in the record.

Counsel repeatedly refers to our apportionment method

as a hybrid method. I submit that a better adjective would

be statutory apportionment method and respondent will

show, we submit, that the net income attributed to this

State is not at all disapportionate to its total net income

earned from its total United States operations.

We also submit that the record will disclose no impair-

ment of the petitioner’s constitutional rights. Counsel for

the petitioner has made inferences and statements that are

erroneous. We prefer not to go into that at this time, but

to leave that for the evidence, as we will subsequently

present.

We submit, in conclusion, gentlemen, that the assessment

of this company from its operations stemming from the oil

well to the pump represents a fair assessment of net income

attributable to this State.

Mr. Timken: Thank you, gentlemen.

Mr. Ragatz, you may call your first witness.

A. 20

Mr. Ragatz: The petitioner calls Thomas Sheridan

adversely.

Mr. Shapiro: Gentlemen, may I interject at this time

that the respondents will enter an objection to the calling

of one of our auditors adversely. The parties have been

notified by the Commission through its letter dated Sep-

tember 6, 1974 that calling witnesses adversely by either

party was appropriate and within the ambit of proper pro-

cedure.

If the Commission permits that procedure now, the

respondent wishes to point out that the prior decision of

this Commission in John H. Verdev, recorded at 7 WTAC

on Page 102, 108 is being reversed. This is the reversal of

a long-standing policy of the Commission which facilitated

an orderly presentation of the taxpayer’s position first,

and also provided an opportunity for cross-examination

of the Department auditors. ,

The respondent will accordingly enter its objection for

the record and it is requested that the Commission’s letter

of September 6, 1974 be made a part of this record. Can

I do so?

(Exhibit Number 16 marked for identification)

Mr. Timken: Mr. Ragatz, any objection?

Mr. Ragatz: No objection.

Mr. Timkin: Does that conclude your statement?

Mr. Shapiro: Yes.

Mr. Timken: Exhibit 16 is received. I would inform

Mr. Shapiro that your objection is overruled and we will

allow the calling of witnesses adversely, and we do recog-

nize that this is changing a longstanding policy of this

Commission, but that all three members met and deliber-

ated and unanimously agreed that that policy should be

changed.

Your objection will be noted for the record, however.

Mr. Sheridan will come forward.

A. 21

Mr. Morris: Before the first witness is sworn, I would

say that I would request a five-minute period of time in

which to review that and the motion requesting that the

witness be called adversely for the record purposes. May

I have five minutes?

Mr. Timken: Yes, of course.

(Recess )

Mr. Timken: Back on the record.

Mr. Morris: Mr. Chairman, Members of the Commis-

sion, I would move this Commission to grant the motion of

counsel for the petitioner in allowing the witness to be

called adversely at this time.

The Chairman: I second the motion.

Mr. Timken: All in favor say ‘‘aye’’. (Ayes voiced)

All opposed? (No response)

Motion unanimously carried. Your objection is noted,

Mr. Shapiro.

THOMAS JAMES SHERIDAN, called as a witness, hav-

ing been duly sworn under oath, testified as follows:

Direct Examination by Mr. Ragatz.

State your full name for the record.

Thomas James Sheridan.

Where do you live, Mr. Sheridan?

EauClaire, Wisconsin.

How old are you?

Thirty-eight.

What is your occupation?

I am an accountant.

And why whom are you employed?

Wisconsin Department of Revenue.

What is your position?

Field auditor.

How long have you held this position?

Eleven years.

POPOPOPOoPOrPOPES

A. 22

Q. Is that the only position you have held with the

Wisconsin Department of Revenue?

A. No.

Q. Would you please describe your employment history

with the Wisconsin Department of Revenue?

A. I started with the Wisconsin Department of Reve-

nue in June of 1962, I worked in the Individual Section from

June to March of ’73—or ’63—and in March of ’63 I

started with the Corporation Section.

Q. And you have been a field auditor for the Corpora-

tion Section ever since?

A. Yes.

Q. What is your educational background?

A. Ihave a Bachelor’s of Business Administration De-

gree from the University of lowa.

Q. What was your approximate average?

A. OC.

Q. Did you have any economic courses, courses in eco-

nomics?

A. Yes.

Q. Anything other than the basic required course?

A. No.

Q. Have you had any other courses in economics since

college?

A. No.

Q. Have you attended any seminars on economics?

A. No.

Q. If I remember correctly from the discovery proceed-

ing, you are now a CPA?

No.

You are not? You have not sat for the examination?

I have since that hearing.

But you have not passed the examination?

Correct.

POPOoP

A. 23

Q. Now, what year did you graduate from college?

A. 1962.

Q. And was your first employment after college with

the Wisconsin Department of Revenue?

A. Yes.

Q. Have you had any other accounting-related experi-

ence except through your employment with the Wisconsin

Department of Revenue?

A. No.

Q. You were the auditor who audited Humble Oil and

Refining Company for the years 1965 through 1968?

Yes.

And when was this audit commenced?

January or February of 1970, I believe.

And when was the audit completed?

I believe my letter is dated May of ’71.

Do you recall in the aggregate how many weeks you

si in Houston, Texas, in connection with this audit.

A. I would say three or four.

Q. Prior to this audit have you conducted any other

audits of oil and gas companies?

PrePrer

A. No.

Q. Have you had any prior oil and gas accounting ex-

perience?

A. No.

Q. Have you had any prior oil and gas accounting train-

ing?

A. No.

Q. Now if I remember from the discovery, you indi-

cated that subsequent to the audit of Humble you audited

four other oil companies?

A. Yes.

Q. Now on the discovery examination you refused to

identify them. Do you still refuse?

A. Yes.

A. 24

What is the basis of your refusal?

Privileged under the statutes.

Do you have a statute in mind?

I believe it is 71 (11).

That didn’t sound like a complete statute number.

Do you want to give that again.

A. Section 71.11.

Q. Now as to each of these four companies, do you still

refuse to describe the basis on which they reported their

Wisconsin income?

A. Yes.

Q. And do you still refuse to describe the basis on which

you assessed them?

A. Yes.

Q. And do you still to refuse to produce the copies of

those audit reports for our examination?

A. Yes.

Q. On discovery I also asked you whether you were

familier with any oil companies that report for Wisconsin

corporation franchise tax purposes on a separate account-

ing basis for any of their functions, such as E and P re-

fining and marketing? Will you now answer that ques-

tion?

A. May I have the question again?

(Question read)

A. May I see the statutes now, please? (Witness refers

to statute book)

Mr. Shapiro: Gentlemen, the information elicited from

the auditor touches on secrecy law and that is what he is

concerned about, and his reluctance is understandable, and

I submit that under that secrecy provision the auditor

should not be required to go into the factual matters of

any other company that was audited.

Mr. Morris: Mr. Chairman, just a question of Mr. Sha-

piro. Mr. Shapiro, if the auditing of a tax return is the

OPOorPe

A. 25

basis for a model of the auditing of this action before us

today, how then will we receive the information that would

be necessary to base—or how the Department based its

assessments on such—in other words, you usually have

rules, rules that you follow, and if these rules are not part

of an auditing function of another taxpayer, how do we

find this out?

Mr. Shapiro: Mr. Commissioner, we submit that if an

audit of another taxpayer—working papers of another tax-

payer may have been used to pattern some similar pro-

cedures in connection with the current audit, that does not

in anyway constitute a rule. The standard auditing pro-

cedure as disclosed in the discovery is for an auditor to

usually have the work papers of the same company for a

preceding period when he is auditing that company, and

this—as the record will disclose, Mr. Sheridan had the

preceding work papers in his possession for Humble Oil

Company, and that is what he used as the basis for his

audit.

Mr. Morris: Are you saying then that another tax-

payer—on the assessment of another taxpayer it does not

play any role in the assessment of this taxpayer?

Mr. Shapiro: It is hard to categorically say. Our

process must be uniform, and we make every attempt to

make our auditing procedures uniform.

Mr. Morris: But you can have uniformity and secrecy.

I understand the dilemna that you are in with the confi-

dentiality of the tax returns.

Mr. Shapiro: I believe the discovery testimony also

disclosed that, according the judgment of the deponents,

we have uniformly used apportionment in the auditing of

oil companies, multi-state oil companies.

Mr. Ragatz: Mr. Chairman,,just as part of that discus-

sion, I would like to interject that that is precisely the di-

lemna the petitioner has been put in, that the respondent’s

A. 26

witnesses can say we treated them all uniformly, and we

have no way of investigating and examining to determine

whether that is a correct and honest truthful statement, or

whether reasonable accounting minds could differ as to

whether they treat them equally.

In fact, during the discovery proceedings there were

admissions at particular places with the methods that were

not quite identical, but we have been afforded no oppor-

tunity to examine that.

Now I fully expect when I ask a question the witness is

going to refuse to answer it. My intention is to preserve

that question, should it ever be necessary to raise it later

on, but I think it points out vividly the handicap that a pe-

titioner in our position is under, not only aren’t their rules

as to how this very complicated method is supposed to be

applied, but we can’t even see the application of it to see

that we are getting uniform treatment.

Mr. Morris: Mr. Chairman, I understand the dilemna

that Mr. Ragatz is in, the taxpayer that is involved in this

action, and the records being held confidential for tax pur-

poses, but also you being in the business and representing

a large corporation, a method could be developed if this

rule is changed in which a competitive company could ex-

amine tax records of another competitive company. Now

that would be also a problem that Mr. Shapiro would have

to face.

The question I am trying to get at is, if this is a rule of

the Department on uniformity, how are we going to de-

termine what is uniform and what is not?

Mr. Shapiro: Mr. Commissioner, if I may comment on

that, each audit must ultimately stand on its own—on its

own feet, on its own merits under the statutory rules in our

income tax law, so that what we are testing is the audit

of this company based on the statutes. That is basically

what we are testing.

A. 27

Mr. Ragatz: I would like to point out for the record

that the argument of counsel for the respondent clearly

overlooks the constitutional right to equal protection of

the laws, and I have argued this subject before. I don’t

know how a petitioner in our position nor how the Com-

mission itself can make any intelligent analysis of the equal

protection question without this kind of information.

Mr. Timken: Anything further? Mr. Sheridan, are you

now in a position to answer the question that has been

put to you? Do you want it read again?

The Witness: Yes.

(Question read: On discovery I also asked you whether

you were familiar with any oil companies that report for

Wisconsin corporation franchise tax purposes on a separ-

ate accounting basis for any of their functions, such as E

and P refining and marketing. Will you now answer that

question?)

A. No.

Q. Do you have knowledge of any other oil company

that is currently contesting an assessment based upon ap-

portionment?

Mr. Shapiro: That and the question goes to the same

substance of the others unless counsel—

Mr. Timken: Are you objecting?

Mr. Shapiro: Yes.

Mr. Ragatz: I am not asking him to identify it. I am

asking whether he has knowledge.

Mr. Timken: The objection is overruled.

A. Yes.

Q. Is there more than one such contest in process?

A. I am not certain.

Q. You are only thinking of one in answering the ques-

tion to the affirmative?

A. I know of one.

A. 28

Q. Is that case docketed before the Wisconsin Tax Ap-

peals Commission?

A. I am not certain.

Q. Is that the case of Union Oil and Refining Com-

pany?

A. Yes.

Mr. Ragatz: Off the record fer a minute.

(Discussion off the record)

(Exhibit Number 17 marked for identification)

By Mr. Ragatz:

Q. All right. I show you what has been marked as Ex-

hibit 17 which counsel for the respondent indicates that

it will agree and stipulate it is a true and correct copy of

the petition for review of the Union Oil Company of Cali-

fornia, which I believe I erroneously called the Union Oil

and Refining Company. This is dated May 10th, 1973, ad-

dressed to the Wisconsin Tax Appeals Commission and

attached thereto is a copy of the Answer of the Wisconsin

Department of Revenue which is file marked July 11th,

1973.

Are you familiar with that document?

A. No.

Q. But you are familiar with the fact that the Union

Oil Company of California is contesting an audit?

A. Yes.

Q. Were you the auditor on that case?

A. I decline to answer.

Q. Do you recall me questioning you under oath on the

15th day of January, 1974, at the office of the Tax Appeal

Commission at 1 West Wilson Street, Madison, Wiscon-

sin?

A. Yes.

Q. And you were under oath at that time?

A. Yes.

A. 29

Q. Did you answer the questions propounded to you

honestly and truthfully to the best of your ability?

A. Yes.

Q. Do you recall me asking you as follows: ‘‘ Question,

Mr. Sheridan, it’s been indicated on the record that—

Mr. Timken: What page is that?

Mr. Ragatz: 17; I’m sorry.

Mr. Timken: You may proceed.

By Mr. Ragatz:

Q. ‘‘Question, Mr. Sheridan, it has been indicated on

the record that the Union Oil case is currently before the

Wisconsin Tax Appeals Commission. Is that a company

you audited?’’ And, ‘‘Answer, Yes.”’’

Is that your response at the time?

A. Yes.

Q. Why do you now refuse to answer the question?

A. Under Section 71.11, information of this type is

confidential.

Q. isn’t the document before you labeled Exhibit 17

now a public record, to the best of your knowledge?

A. Yes, it is; at least I guess it is.

Q. And does that document reflect a protest and peti-

tion for review to an assessment that resulted from your

audit?

A. It apparently is a protest to an assessment made by

this Department.

Q. Is it protesting the assessment that resulted from

your audit? ict

A. Again, under Section 71.11 I think that information

is confidential. There was an audit. 7

Q. You conducted it?

A. (No response)

Q. For what years did you audit it, do you know?

A. I decline to answer that.

A. 30

Q. I take it that you also decline to answer the ques-

tion as to the basis on which Union Oil reported its Wis-

consin income?

A. It might be here (indicating), I don’t know.

Q. I am asking you.

A. I decline under Section 71.11.

Mr. Timken: For the record, Mr. Sheridan, is it my

understanding that you are declining to answer these ques-

tions, all of these declinations are based upon your inter-

pretation of 71.11 of the Statutes?

The Witness: Yes, sir.

Mr. Timken: So any time you decline to answer, that

is your basis?

The Witness: Yes.

By Mr. Ragatz:

Q. I take it you decline to answer as to whether or not

you tried to put this taxpayer on the apportionment

method?

A. I decline.

Mr. Ragatz: Well, Commission, this illustrates the di-

lemma the petitioner finds itself in. I would like to move

the admission of this exhibit because of his declining to

answer. I have not been able to lay the kind of founda-

tion that I hope to, and certainly have not received any

information, but I do think the document itself should be

admitted in that it sets forth at length an objection to the

apportionment assessment and has some bearing on this

issue in this case and at least will lend some possible issue

of legal protection.

Mr. Shapiro: The respondent will enter its objection

on the grounds of relevancy.

Mr. Timken: Off the record for a moment.

(Discussion off the record)

Mr. Timken: Objection is overruled.

A. 31

Exhibit 17 is received.

By Mr. Ragatz:

Q. Mr. Sheridan, I take it you would decline to answer

any further questions whatsoever relating to the manner

in which Union Oil reported its income, or the manner in

which you assessed it?

A. Yes, sir.

Q. Therefore I will not take any further time with the

Commission on that.

Did you audit Clark Oil and Refining Company?

A. I decline to answer.

Q. Are you aware as to whether or not there is a case

pending before the Tax Appeals Commission with Clark

Oil and Refining Company as the petitioner?

A. I heard of it.

Q. You don’t know of your own knowledge?

A. No.

(Exhibit 18 marked for identification)

Q. I show you what has been marked Exhibit 18, which

counsel for respondent has agreed to stipulate is a true

and correct copy of the petition for review filed with the

Wisconsin Tax Appeals Commission by Clark Oil and Re-

fining Corporation, and the filing stamp shows April 20,

1973. Are you familier with that document?

A. No.

Q. I would add that attached to the document is a copy

of the Answer of the Wisconsin Department of Revenue,

the date stamped is May 8, 1973. Are you familiar with

the tax assessment protested by that?

A. No.

Q. You are not?

A. No.

Q. And you have refused to tell me whether or not you

audited this corporation?

A. No. No, I did not audit that corporation.

A. 32

Q. You did not audit that corporation?

A. I did not.

Q. Are you familiar at all with the Clark Oil audit?

A. No.

Q. The Clark case before the Commission?

A. No.

Q. Iam intrigued, Mr. Sheridan, to know why you feel

that it would be a breach of the confidentiality statute to

answer in the affirmative if you had a company, but you

do not feel it is a breach of the confidentiality of the stat-

tue to answer ‘‘No’’ if you did not audit it.

Mr. Shapiro: I suggest this line of questioning has no

relevancy.

Mr. Timken: Objection sustained. It is argumentative.

The record speaks for itself.

Mr. Ragatz: I will hold off with Exhibit 18 until we

can find a witness that purports to know something about

it.

By Mr. Ragatz:

Q. What training, Mr. Sheridan, prior to the audit of

Humble had you received as to auditing of corporations

with multi-state operations?

A. Initially in 1963 when I started in the Corporation

Section, we had a training session oral in nature from the

Section chief, an exhaustive course which dealt with cor-

poration auditing. Then through experience working on

corporations, I worked on corporations with multi-state op-

erations.

Q. How long had you worked prior to Humble audit

on multi-state audit?

A. Ten years.

Q. I believe you testified that you started with the De-

partment in 1962 and with the Corporation Section some-

time in 1963?

A. March.

A. 33

Q. And that you testified you started the Humble audit

in 1970, and is there something wrong with my mathema-

tics or is it yours?

A. I don’t understand your question. What do you

want?

Q. I can’t see where you got ten years’ experience be-

tween sometime in 1953 and sometime in 1970?

A. Humble was not the only company I audited.

Q. I asked you how much experience you had had aud-

iting multiple-state corporations prior to the Humble audit.

A. Prior to the Humble audit? I am sorry, I didn’t

hear that. That would be six years.

Q. You mentioned training. Were there documents

that were involved in this training?

The initial training?

Yes.

No, that was oral.

The initial training was oral?

Yes.

Did you have any subsequent training that involved

use of documents?

A. We have had auditor conferences in which we will

discuss a particular topic of interest to the majority of

the auditors. It is more on-the-job training. I juniored

with two senior auditors, and these audits all were on mul-

ti-state corporations.

Q. I take it you had no formal instruction?

A. What is ‘‘formal’’?

Q. Course work? Course materials. Class room train-

ing.

A. When I initially started in the Section we had class-

room training.

Q. That was the oral training?

A. That’s right.

OPOoPOopP

A. 34

Q. Did you use the Department’s manual, or at least

the Sections relating to corporation audit?

A. What section do you mean?

Mr. Timken: Mr. Ragatz, we will break for lunch.

(Noon recess, 12:00-1:30 p.m.)

Mr. Timken: Gentlemen, are you ready to proceed?

Mr. Shapiro: Yes, sir.

Mr. Timken: Back on the record, please.

Mr. Sheridan, you have already been sworn and now,

Mr. Ragatz, you may continue.

Examination by Mr. Ragatz.

Q. Before we broke for lunch, Mr. Sheridan, I was asking

you about whether you had used the Department’s manual

as part of your background for your work on multi-state

corporation, and I am referring specifically to Chapter 16

out of the manual that has been admitted as Exhibit 10-A

in this proceeding; and | ask you if you are familiar with

the provisions with Chapter 16 and whether you used that

as background in your audit?

A. I did have a copy of this and I am certain I am

generally familiar with the contents.

Q. Was that part of your background at the time you

commenced the audit of Humble?

A. I can’t remember when this was printed. Is there

—TI don’t know when it was put into print.

Q. Your answer is that you don’t know whether that

was part of your background or not?

A. Iam not certain.

Q. Are you familiar with a paper written by a Mr.

Longhorn?

A. Yes.

Q. I show you what has been admitted as Exhibit 12-B

and ask you to identify that. Is that the paper I am re-

ferring to?

A. Yes.

A. 35

Q. And were you familiar with the paper at the time

that you commenced the Humble audit?

A. Yes.

Q. What was your familiarity with it?

A. I had seen it. I had read it.

Q. Would you agree that the audit of an oil company is

a far different experience than the audit of another kind

of multi-state company? |

A. It has its unusual characteristics, yes, but it’s es-

sentially a multi-state operation.

Q. One of the unusual characteristics is the complexity

of the exploration function, wouldn’t you agree?

A. I think it is more in determining the income, de-

termining the income of that department.

Q. You really have that income as a starter, don’t you?

A. We were given data here, yes.

Q. And didn’t you use in your audit report the eter-

nally determined exvloration department income as the

starting point in the computation that is known as the

barrel formula?

A. The net income, no.

Q. Well, adjusted to the Wisconsin basis?

A. We did use the factual net income.

Q. Of the E and P Department?

A. That’s correct, in trying to determine the net in-

come attributable to the crude oil sales with two outsiders.

Q. But your starting figure was the Humble determined

factual net income of the E and P Department?

A. For which purpose now?

Q. For the purpose of commencing the barrel formula

calculation.

A. No, we don’t use net income in the barrel formula

computation.

Q. But you did, and I can point out to you in the audit

report where you did pick up the company internal gener-

A. 36

ated income figure as a starting point to your calculation

process, is that not correct?

A. Yes, for the purpose that we picked it up.

Q. Now, at the time that you commenced the Humble

audit had you been given any specific training of any na-

ture as to the concept of business in Wisconsin for pur-

poses of Section 71.07, subparagraph (2)?

A. Well, I think this training—I would have trained

all through my auc’‘ing experience. Humble is not that

unusual in that it is a multi-state operation. We have many

companies that are multi-state operations.

Q. I would like you to specifically answer my question

as to whether you were given any specific training as to

how to define the statutory concept of what is business in

Wisconsin?

A. Exclusively for this audit?

Q. Yes—no, just prior to this audit.

A. Well, as I stated, I have had extensive experience.

Q. But not specific training as to that particular con-

cept?

A. Any company which is a multi-state operation has

similar problems; one is determining the net income.

Q. Will you answer my question yes or no?

A. I don’t think I can. Rephrase your question.

Q. Have you had any specific training as to how to

determine the concept of whether or not a business is uni-

tary?

A. I consider any training that I have gained as being

specific training in this concept.

Q. Have you had any specific training as to how to

determine the concept of what is an integral part, again

for purposes of the statutes I mentioned?

A. I think that related to the prior question. It is

gained in the experience of auditing multi-state companies.

A. 37

Q. So the only training you had was your general ex-

perience in auditing multi-state companies?

A. I have the advantage of reading other auditors’

papers, which you have shown me.

Q. What papers were these?

A. Well, Mr. Longhorn’s.

Q. What else?

A. Can we determine when this was printed?

Q. Iam afraid on the witness stand you have to answer

questions, not ask them.

A. What is the question again?

(Last question read back)

What other papers had you read?

I don’t remember.

Possibly you hadn’t read any?

I don’t remember.

I would like to read you a sentence or two from Ex-

hibit 11—10-A at Page 323 which you have in front of you

and this is from a section entitled ‘‘The Unitary P isiness

Concept,’’ and it is labeled 83.3. Unitary business is one—

Mr. Timken: Do you have it, Mr. Sheridan?

The Witness: No.

Mr. Timken: Let him find it.

Q. Page 323, about the middle. ‘‘A unitary business is

one which operates as a unit. Its business cannot be segre-

gated into independently-operated branches. Its opera-

tions are integrated and each branch is dependent upon

and contributory to operations of a business as a whole.’’

I take it that you concur in that manual’s definition?

A. A unitary business is one—

Q. I think you can answer the question yes or no.

A. Yes.

Q. So the test then as stated by the manual is whether

the business is dependent upon and contributory to non-

Wisconsin activities is your test?

‘OPOpPe

A. 38

A. What test?

Q. The test that we are talking about, the definition of

the test for unitary business.

A. Well, I just wouldn’t limit it to that definition.

Q. Now, according to the manual and the statute, I be-

lieve you are supposed to make a determination as to

whether a business is a unitary business?

A. Correct.

Q. What factual determination did you make in rela-

tion to Humble as to the statutory concept of business in

Wisconsin?

A. Humble’s business in Wisconsin?

Q. What factual determination did you make as to that

statutory requirement?

A. Well, we knew that Humble had marketing activities

within Wisconsin.

Q. You knew that?

A. Yes.

Q. Did you make a factual determination as part of

your audit?

A. Yes.

Q. Iassume that you could point out in your audit work

papers where that is located?

A. Well, we would have statements even from the Tax

Department of Humble which indicated that their market-

ing activities indicate—in your return you had sales in

Wisconsin.

Q. Now I have placed before you documents which have

been admitted into evidence here labeled Exhibits 11-t

and 11-6, which purport to be your work papers, and I as-

sume they are your work papers on the Humble audits of

the years ’65 through ’68?

A. Yes.

Q. I guess I will ask you a couple other questions be-

fore I ask you to tell me where the work papers are located.

A. 39

You indicated you did make a factual determination as

to petitioner’s business in Wisconsin. Did you make a

factual determination as to whether the petitioner was a

unitary business?

A. Yes.

Q. And then I presume that you can point out in your

workpapers where that factual determination is?

A. I don’t write down everything.

Mr. Shapiro: May I interject at this point. First, the

auditor is not an attorney, as we all recognize, and we all

know he is not an attorney.

Secondly, the kind of questioning suggests that the audi-

tor in his—that counsel wishes to reflect adversely upon

the auditor rather than to concentrate on the merits of the

assessment itself, and for that reason we think that this

line of questioning should be limited so that the auditor is

not being tried but that the assessment in evidence is being

tried.

Mr. Timken: So you are objecting to this line of ques-

tioning?

Mr. Ragatz: I would like to comment that that objec-

tion is out of line and counsel apparently does not under-

stand the line of questioning, and I think I certainly have

a right to examine this witness on what, if any, factual

determinations he made. I am not attempting to ask him

legal questions. I phrased each question, I believe, as to

‘‘what factual determination did you make.’’ This was

the agent that audited the company that presumably de-

termined the company was unitary, and I think I have

every right in the world to find out on what facts he based

that decision.

Mr. Timken: The objection is overruled.

(Question read: And then I presume that you can

point out in your work papers where that factual de-

termination is?)

A. 40

Q. Can you find in your work papers where your fac-

tual determination is in relation to the unitary concept?

' A. As I stated, I haven’t written down everything that

I have learned while I was at Houston. |

Q. Are you testifying that there is no factual deter-

mination set forth in your work papers?

A. I will have to look. Again, you are asking for fac-

tual determination what?

Q. You told me, I believe, that you made a factual de-

termination that the taxpayer was a unitary business{

A. Yes.

Q. I would like to know on what facts that determina-

tion was made and where that is set forth in your work

papers?

A. On my work papers, ‘‘C’’ we know that Humble had

extensive sales—I know from looking at functional account-

ing records that you had sales from the E and P Depart-

ment to Refining, sales from Refining to Marketing, and

we know that you have reported sales in Wisconsin, you

have print-outs which show and isolate all of these sales

into Wisconsin, so here is an instance where all sections

of your company are operating with one goal in mind, and

that is to make the sale.

Q. Is that what your determination of unitary was

based on?

A. I don’t think there is any one answer.

Q. Well, what other factual situations was it based on?

A. Well, we know that Wisconsin was just part of a

region—Wisconsin was part of the Midwest Region.

Q. Do you have that in your work papers?

A. Well—(witness looks through papers) I have pho-

tocopies which were given to me by Humble showing your

exploration divisions, marketing regions, your refineries

and plants, producing divisions, marine activity, and if

you look at that map you will see where the Central Re-

A. 41

gion includes 10, 12 states; and it says it has a headquart-

er—or a regional office at Memphis. This happens to be

dated May and June of ’68.

Q. Is that what you based your defining of ‘‘unitary’’

on?

A. Well, this is one part.

Q. All right. What else?

A. Pardon?

Q. What else?

A. Just the dependence of one division upon another.

Q. Did you make a factual determination as to depend-

ence?

A. Well, I think I had various talks with various peo-

ple in the Humble Tax Department as to general opera-

tions of Humble Oil Company, and it is a known fact that

they can’t operate a refinery without crude and that they

have a supply department. This department is buying the

crude to operate that refinery and we know the product has

to get out of the refinery and into marketing; and somehow

you got to sell it. To me these are qualities which lend

toward a unitary company; no one fact.

Q. Is that laid out in your work papers?

A. Not in specific words like that. This is an over-all

determination.

Q. It is a big company, right?

A. Very big.

Q. Does that make it unitary?

A. Just being big, no.

Q. Just operating in multi-states, does that make it

unitary?

A. No.

Q. What is it that makes it unitary?

A. A variety of activities of that company.

Q. Well, can you enumerate them?

|

A. 42

A. Bigness could lead towards unitariness. Operating

in many states could lead towards unitariness.

Q. You had to make a factual determination of unitari-

ness, and I have asked you several times to enumerate for

me what facts you considered in arriving at that conclu-

sion. You said a lot of vague things, and can you be more

specific? |

A. Definitely. The direct—the total operations of this

company starting with securing oil to refining that oil to

selling that oil or the refined product, this was all part of

a company. To me this is a unitary operation. It is where

Wisconsin is contributory or dependent upon the opera-

tions out of the State, where Humble is headquartered in

Houston, Texas, this controls this whole company out of

Houston.

Q. Where does it say that in your work papers?

A. On the same page.

Q. What page is that?

A. These maps, it shows Houston as the headquarters,

and the word ‘‘headquarters’’—you are direct in some-

thing.

Q. Does it say that Houston controls the Wisconsin

operations?

A. No, it doesn’t say that.

Q. Does it say anywhere in your work papers—

A. Well, it is as I stated that we—

Q. What facts do you base your purported knowledge

on?

A. Speaking with people in the Humble Tax Depart-

ment.

Q. And they told you that Houston controls the Wis-

consin operation?

A. Well, Houston is called your headquarters, company

headquarters. Humble is a company.

A. 43

Q. So it is your conclusion that Houston controls the

Wisconsin operation?

A. Yes, sir.

Q. And you were not told that in Houston?

A. Houston controls the operations of Humble.

Q. Answer my question. You were not told in Houston

that Houston controls the Wisconsin operation?

A. Indirectly it might have, Wisconsin being a mar-

keting state would have reported to a marketing office and

the marketing office would have reported to the region,

and the region to the headquarters.

Q. Were you or were you not told in Houston that Hous-

ton controls the Wisconsin operation? I think you can

answer that yes or no.

A. What are you asking for? A direct statement? Did

somebody say that identical statement?

Q. Yes or no.

A. No, nobody, no.

Q. That is your conclusion then?

A. No, you asked me for my—

Q. Have you any other facts set forth in your work pa-

pers that you assert supports your determination that this

is a unitary company?

A. Well, we can look at your functional income.

Q. Do you have that in your work papers?

A. I think I have parts of it. We do have—in 1968 I

happened to make a copy of what Humble called their

Comp. Code, and it was their income by functions, and it

showed out of—well, let’s say six and a half billion dollars

in sales, almost three billion is eliminated on an intra-com-

pany elimination, and that means that that had to be sales

from one department to another department within Hum-

ble, and they have been excluded.

Q. I take it you are aware that Humble set up an or-

ganized functional department?

A. This is not unique.

A. 44

Q. And functional profits and losses are determined

as to each function?

A. Yes, that’s apparently how they internally account.

Q. What other facts did you base your unitary deter-

mination on?

A. Well, the knowledge that most of the staff activity

of this company is in Houston.

Q. Is that in your work papers?

A. I don’t think that I have a statement that says

‘‘staff activity is at Houston.’’ I was told that. We knew

the tax departments down there.

What other facts?

Tail-ending accounting is at Houston.

The what?

Tail-end acc-unting is down at Houston.

What do you mean by that?

Well, the preparation of the financial statements,

book statements. This would all be summarized at Hous-

ton.

Q. Does that make it unitary?

A. This can blend in all their audits.

Q. Do you have that in your work papers?

A. No, this is again knowledge that I have been told.

I don’t write down everything I do. I am not a lawyer.

Q. Do you have a section of your work papers where

you summarized the factual determination that you made

there that allows you to arrive at the conclusion that Hum-

ble is unitary?

A. Iwill have to go through my work papers.

Q. All right.

A. At this point Humble was actually a wholly owned

subsidiary of Standard Oil, New Jersey, also which is just

one company owning another company.

Q. Does that make it a unitary company?

A. It lends a little credence to this.

POoPOPO

A. 45

Q. What facts do you base that statement on?

A. Well, that Humble is a subsidiary of Standard Oil,

New Jersey?

Q. No, that that has anything to do with whether or

not it is unitary?

A. I am not sure that particular statement—I would

have to think about that one. The fact that they do have

intra-company sales and cost of sales and elimination in-

dicates that there are activities between these companies.

Q.. Where in your work papers have you summarized

the facts upon which you base your determination of uni-

tary?

A. I don’t have any one statement. My whole paper

is a product of my audit and I might have it throughout.

I don’t necessarily put down one line as such, ‘‘Humble

is unitary.’’ It is the summary of my whole audit, my con-

clusions based on everything that I learned about it is that

Humble is a unitary operation and I was trying to show

you various things which enter into this that really con-

vinced me. *

Q. Well, a review of your work papers would reveal a

lot of your accounting schedules, but not much else. Is it

your position that the accounting schedules establish that

the company is unitary?

A. Certainly accounting facts enter it. For example,

your one on sales, just running on out to E and P, not the

refining, in one year it has to be 700 million and this 700

million gets eliminated because it all went into refining.

Q. Does that make it unitary?

A. It shows that these two divisions are operating and

we know that refining has to get rid of it, too.

Q. And you’ve come to that conclusion because you say

that production flows from E and P to refining?

A. It runs all the way through the company.

Q. It doesn’t come into Wisconsin, though, does it?

A. I think products come into Wisconsin.

~~ =

ee ee | Oe ~ o

A. 46

Q. Do you have any information that says one drop

of Humble produced erude oil or heating oil comes into the

State of Wisconsin, or one drop of gasoline?

A. I think all their lubricants as greases and oils and

possibly chemicals all come into Wisconsin.

Q. Do you have any information in your work papers

to make that statement up?

A. I will find it. I notice in one of my statements here

I made the statement that a sales and use manual was de-

scribed by the tax department in Houston and was appar-

ently throughout the company. This would show again a

dependence on outside of Wisconsin, and when I was do-

ing the sales and use tax examination—

Q. I believe that that has nothing to do with the ques-

tion before you. The question before you was do you know

or do your work papers show that any drop of gasoline or

heating oil sold by Humble is sold in the State of Wiscon-

sin and was produced by Humble E and P?

A. I answered that question no. I was talking about

lubricants and motor oil which are your own. This state-

ment was given to me. The name says Exxon on a ean of

oil.

Q. Apparently you can’t find—

A. As I said, I don’t write down everything I do on

the audit either.

Q. But you agree that no gasoline or heating oil pro-

duced by Humble was sold in the State of Wisconsin?

A. I don’t know that fact, correct.

Q. But you have no facts that would indicate to the

contrary, either, do you?

A. I think it is I probably didn’t. It seems economi-

cally infeasible to ship up to Houston.

Q. Answer the question yes or no. You can testify on

direct examination if you want to make an estimation, but

you will have to answer my question directly.

A. If I can.

A. 47

Q. Now, what facts did you consider in making a de-

termination that the business of Humble in Wisconsin was

: : : ’

an integral part of a unitary business

A. Well, we knew that the warehouse for all the pack-

age products was in Chicago and supplied in Wisconsin.

Q. That makes the Wisconsin operation an integral

part?

A. Not backed on facts.

Q. The packaged products represent a pretty small

percentage of the volume, don’t they? |

A. But it is a part of Humble’s business, packaged

roducts. :

. I suppose you can say a couple percentages Is part,

but it is a pretty small part? |

A. I really wouldn’t know. I would imagine 50.

Q. What other facts did you base your determination

of integral part on?

A. Well, we know that the marketing people came un-

der in the chain of command from outside of Wisconsin.

Q. Do you have that in your work papers?

A. I just told you that, about that map; that the mar-

keting region was at Memphis.

Q. Did the map show that?

A. Well, it indicates that.

Q. What other facts do you have? .

A. I think you have some salesmen go from Wiscon-

sin into—or from Illinois into Wisconsin. I don’t know

if the reverse is true.

Q. Do you have that in your work papers? ;

A. It seems that I have a check list showing the sta-

tions involved and their salesmen. The Beloit bulk plant

is operated by an Illinois staffman.

Do you have that on your work papers?

Yes.

What other facts do you have?

What was the question again?

de ad

A. 48

Q. What other facts do you have that you based your

determination that the Wisconsin operations of Humble

were an integral part of a unitary business?

A. Again I think it is a situation where you have to

look at the company as a whole and then see where does

Wisconsin fit in. It happens to be a marketing state. Geo-

graphically there are no wells in Wisconsin so there is no

exploration here.

. And there is no refining here either?

A. That’s right, but there is marketing and that’s part

of this business. The business of Humble is to secure, pro-

duce, refine and market, and Wisconsin is a part of this.

it just happens that Wisconsin is part of the marketing

department.

Q. There are a lot of independent marketers, aren’t

there?

A. I think there are fewer today.

Q. But there are thousands of independent marketers,

aren’t there?

A. I don’t know that.

Q. At any rate, a great number?

A. I don’t know that.

Q. And the service stations line up right across from

each other; there might be an independent station on the

same corner as the Enco station, might there?

A. Might be. It is less frequent though. Most are ma-

jor companies, integrated companies.

Q. Did you consider any other facts in arriving at your

integral part determination?

A. Wisconsin was certainly dependent on outside of

Wisconsin to get the product to sell.

Q. It brought the product from here?

A. Well, I am not sure. That was some—They always

had their own manufacturing plants that created lubri-

cants and greases and that was all eventually filtered into

A. 49

Wisconsin; and so Humble operates as a nation-wide com-

Be How about gasoline? Do you know where they got

their gasoline?

I think it came either from exchange or purchased.

From an outsider?

From another oil company, yes.

How about fuel oil?

I think the same is true.

Heating oil?

I think the same is true there.

Do you know whether or not those three products

constituted the greater percentage of the business done by

companies in the State of Wisconsin?

A. I believe that’s true.

Q. And you do know that the acquisition of all those

three products came from other companies ?

A. Well, I am not exactly certain how they got ahold of

i uct.

we “i wasn’t product refined by Humble, was it?

A. I don’t think it was.

Q. And it wasn’t from crude oil or natural gas pro-

duced by Humble either, was it?

A. These three areas?

Q. That’s right.

A. Right. |

Q. Now you stated that the Wisconsin operations were

dependent on the rest of the company. What facts do you

have to support your statement based—let’s concentrate

on each function. What facts do you have that Wiscon-

sin’s marketing operations by Humble were dependent upon

its exploration and production functions?

A. Well, marketing to obtain a product in order to

sell it.

Q. That’s your fact?

OPpoporer

A. 50

A. And obtained its product from refinery or pur-

chased it. This must take tremendous coordination.

Q. Is that your answer to my question as to why Wis-

consin—

A. I don’t think there is any one fact that can estab-

lish an answer to the question you have asked. It’s an

overall judgment on my part. Many facts, many little

things that might seem incidental by themselves, all seem

to indicate that this is the way Humble operates. And, as

such, to me that’s a unitary concept; that’s a unitary busi-

ness.

Q. So that’s why you say that Wisconsin marketing was

dependent upon Humble’s E and P?

A. Well, if you didn’t have E and P you wouldn’t have

had that oil to make into the can to sell in Wisconsin as

car oil, would you, or lubricants?

Q. Well, let’s talk about the fuel oil and the gasoline

and heating oil.

A. Well, there you merely bought it or exchanged it

with somebody else because it’s economically feasible for

you to buy rather than ship your own product up here.

Q. So you are really not dependent upon Humble’s E

and P for those products, are you?

A. Not Humble’s own product because, for their own

reasons, tended to buy—

Q. Now what facts do you have that would indicate

that the Wisconsin marketing operation was dependent

upon Humble’s refining function?

A. Well, again, marketing has to have a product to

sell.

Q. Let’s take the fuel oil, heating oil and the gasoline.

What facts do you have that would indicate that Humble’s

marketing which didn’t market, you agree, any Humble

refined of those three products; what facts do you have

that would indicate that Wisconsin marketing was a de-

pendent upon Humble refining?

A. 51

A. They had to get the lubricants, oil, chemicals, li-

quids.

Q. I am talking about the three major products.

A. Well, you just stated that they bought it from some-

body else or exchanged it.

Q. So they really weren’t—

A. Somewhere there is somebody that was in charge;

and they had to be securing apparently this product or

they had to be exchanging all this product and get it into

Humble’s system.

Q. But they weren’t dependent upon the product re-

fined by Humble itself, were they?

A. You can’t trace one barrel of crude all the way

through Humble.

Q. Well, you weren’t able to do that, were you?

A. I don’t think anybody can. ;

Q. Well, what facts do you have that Wisconsin mar-

keting was dependent upon any other functional depart-

ment of Humble?

A. Somebody prepared that return.

Q. Is that your answer? .

A. Well, that’s a statement, isn’t it? Somebody pre-

pared that return. That means it took accounting or tax

or legal or somebody that was involved in the Wisconsin

operation. You have various taxes that had to be handled

by somebody.

on And that made Wisconsin’s operations dependent

ody?

* inet eine. Not one fact can be decided on.

Q. But I am asking you to explain on what facts you

based your determination. You said you made a determina-

tion and I think I am entitled to know what facts you based

it on. ;

A. The internal coordination amongst this company.

Q. And is that laid out in your work papers?

A. 52

A. Well, just taking your functional income you see

where you have a sale of crude oil from E and P to re-

finery. And then you take refined products from refinery

to marketing and then it goes from marketing to the con-

sumer, and you have tremendous—You have almost three

billion dollars of eliminations which shows that this is all

intra company.

Q. But other than a very minor amount of packaged

products, there was none of this three billion, as you say.

of crude oil that came into the State of Wisconsin wi

there?

A. The point is the company did have this.

Q. No. Answer my question yes or no.

A. What’s the question?

Mr. Ragatz: Read the question, please.

(Question read)

The Witness: Other than packaged products. I would

think we would also want to say other than liquids or chem-

icals or anything but those three items of heating oil, fuel

oil and gasoline.

By Mr. Ragatz:

Q. Well, what facts do you have that would indicate

that anything else besides packaged products that was pro-

duced and refined by Humble ever came into the State of

Wisconsin?

A. I don’t know exactly what every dollar sale in Wis-

consin is, if that’s what you are asking me.

Q. Well, you didn’t mak inati

om alae y e a factual determination as to

A. I don’t analize all of the sales to determine what

the product is. When the company says, I made 12 mil-

lion dollars or 18 or 20 million dollars of sales—

Q. But you have no facts then that would indicate—

A. The commodity?

A. 53

Q. —that other than a minor amount of packaged

products that was produced and refined by Humble ever

came to the State of Wisconsin?

A. L only know they are Humble’s sales. I don’t know

by Commodity.

Q. Allright. That’s fine. You don’t know.

A. By commodity.

Q. All right. Now you indicated that you used certain

facts to arrive at the decision that Humble was a unitary

company?

A. To arrive at the decision that Wisconsin opera-

tions were an integral part.

Q. Were those the same facts in each case?

A. Well, the question of a unitaryness is many deter-

minations. I don’t quite understand your question, are

they the same facts.

Q. Well, you testified to a lot of nebulous things and

I would just kind of like to have you differentiate and tell

me if there is any difference in the factual deterniination

as to whether a company is unitary versus the factual de-

termination as to whether Wisconsin operations are an

integral part.

A. The operations are an integral part.

Q. Well now, you are stating a conclusion. I want to

know the facts and whether the facts you used there are

the same facts that you used to arrive at the conclusion

that the company was unitary. Is there a difference in

your mind or is it all kind of wrapped up and spinning

around?

A. Was it what?

Q. Strike that.

Is there a difference in your mind ¢ to the facts that

you would use to make those two determinations?

A. The question of unitariness is an overall conclusion

and I think Wisconsin is a part of that conclusion.

A. 54

Q. I am not asking you for conclusions; I am asking

you for facts.

A. Well, in all the information I obtained Wisconsin

was an integral part.

Q. Well, all right. But is there a difference in the actu-

al determination of that versus the factual determination

of the business being unitary?

A. I don’t think there is any question the company is

unitary.

Q. | wish you would answer the question. You are not

answering the question.

Would you read him back the last question, please.

(Question read)

Mr. Timken: Let’s break for ten minutes. It’s been

an hour.

(Short recess taken)

Mr. Timken: Before we proceed I think we are run-

ning into a little trouble. Maybe wa can clarify it.

The answers and the questions at times are overlapping,

so I would appreciate it if you gentlemen would have a

pause so we can get everything down. Mr. Sheridan, if you

don’t understand a question, I urge you to ask counsel to

rephrase it, and if you don’t know the answer, I think you

should say you don’t know the answer and try to be a little

more responsive, if you would, please.

In other words, I don’t think it is proper to reply to a

question with a question. If you don’t understand the ques-

tion, say so and we will handle it in that manner.

You may proceed.

By Mr. Ragatz:

Q. Mr. Sheridan, so as to not belabor the point we

were struggling with before we broke, I would like to ask

you in summary, would you agree with me that whatever

facts you considered in making your determination that

Humble was a unitary company, that these were the same

A. 55

facts that you considered in concluding that the Wiscon-

sin business was an integral part of that company, is that

not correct?

A. Yes.

Q. All right. I believe you concurred in the manual’s

definition of ‘‘unitary’’ as it related to the word ‘‘depen-

dent upon and contributory to the business as a whole,”’

and I asked you about the dependency aspect, but I haven’t

asked you about the contributory aspect.

What facts did you base the determination on that

Humble’s Wisconsin business was contributory to the op-

eration of the business as a whole?

A. Well, it is contributory in that it provides an outlet

for Humble’s sales, and these sales do generate net income.

Is your answer then that it contributes profit?

A normal sale will.

Or a loss.

Profit or a loss.

Did you make a factual determination on what ways

the Wisconsin operation contributed to the overall opera-

tion?

A. Well, your returns had shown a loss and the man-

ner—since J considered Humble to be a unitary operation

and used apportionment, statutory apportionment, net in-

come was realized.

Q. In other words, the contribution you are talking

about was made only because of the application of your

formula that produced taxable income?

A. Well, I don’t believe apportionment isolates the par-

ticular dollar of profit to a particular dollar of sale like

separate accounting tends to do.

Q. I don’t believe that answer was responsive.

A. Would you rephrase the question?

Q. Would you read the question?

(Question read)

OPOoPS

A. 56

A. The apportionment method did report taxable in-

come.

Q. That is the contribution you are talking about, a

contribution of purported profit?

A. No, I can’t under a unitary concept—you can’t iso-

late profit to a dollar of sale.

Q. I am talking about contribution and you have

responded to my question saying that the contribution of

the Wisconsin operation was in terms of profit per your

calculation?

A. Wisconsin had sales, normally sales would contribute

to profit.

Q. That was your factual determination?

A. That is one of them.

Q. What else? Were there any other factual determina-

tions as to how the Wisconsin operation contributed to the

overall operation?

A. I think that statement should really read ‘‘depen-

dent upon and/or contributory to the operation.’ It is

just a part of the unitary company, and when you look at

Humble as an overall company, Wisconsin is just a piece

of that company, and I don’t see how you can isolate it.

I can’t really isolate Wisconsin. It is an overall part of

this company.

Q. You still say it contributed—

A. It contributed sales.

Q. To the whole, if it incurred substantial losses?

A. This depends on how you want to determine what

the income is.

Q. Just assuming ary way you determine it, there are

losses, and would you still say that the Wisconsin opera-

tions contributed to the whole?

A. On a unitary theory, yes, any sale contributes to

the profit.

A. 57

Q. Even if in effect you are contributing a loss?

A. That depends on how you are determining it. You

determine it one way—

Q. I just asked you for the moment to assume that

whichever way you determine it—

A. You could have income, maybe you could have a

loss, I don’t know. /

Q. Now the definition in the manual refers to a business

that cannot be segregated in the independent operating

branches. ‘What facts did you consider in making a de-

termination that the Wisconsin marketing operations

couldn’t be segregated into an independently operating

branch?

A. Would you repeat the question, please?

(Question read) |

A. Since I determined that I felt Humble was a unitary

company, I didn’t look to see if Wisconsin could have

operated as a branch. I wouldn’t—

Q. You didn’t make any determination on that?

A. Whether Wisconsin could be operated as a branch,

os You do recall that the predecessor to the Wisconsin

operation was a separate corporation?

A. Iam not certain of that. I think that was Pate

being a separate corporation?

Q. Right.

A. I believe that is the case.

Q. Did you make any factual determination as to

whether Humble’s E and P function could have been op-

erated independently, segregated and operating independ-

ently as a separate unit?

A. Whether it could have—

Q. Yes.

A. No.

Q. You did not make a determination?

A. No.

A. 58

Q. Did you make a determination as to whether

Humble’s refining function could have been segregated and

operated independently as a separate unit?

A. No, no.

Q. Did you make any determination as to whether

Humble’s marketing function could have been segregated

and operated separately as an independent unit?

A. What do you mean by ‘‘independent unit’’?

Q. Like a separate company.

A. No, I didn’t.

Q. You didn’t?

A. No.

Q. Did you make a similar determination as to any of

e other operating functions of Humble?

A. No.

Q. Such as land management, minerals, coal and shale

oil, or marine?

th

A. No.

Q. You made no such determination?

A. No.

Q. I believe in your discovery deposition you indicated

that in October of 1968 you attended some kind of a con-

ference at the Department of Revenue where a paper was

given. Do you recall that conference?

A. Yes.

Q. And can you identify the paper?

A. There were various papers.

Q. You say there were various papers given that day?

A. Yes.

Q. Was there one particular paper given by Mr.

Kaspar?

A. Yes. |

Q. Ishow you what has been admitted into evidence as

Exhibit 11-11, and ask you if that is a paper we were just

referring to?

A. That looks like it.

<<

A. 59

Q. And that is by Mr. Kaspar and a Mr. Paul?

"A. Yes.

Q. And that was presented at the 1968 conference?

A. Yes.

Q. And you were in attendance at it?

A. Yes.

Q. Who was in charge of that conference, if you recall?

A. Probably Mr. Leidiger and Mr. Hoel.

Q. What was the subject of this confereace?

A. Topics of a general nature of interest to the audi-

tors.

Q. At least part of it related to oil and gas auditors?

A. This one paper, yes.

Q. Who was the co-author of that paper with Mr.

Kaspar?

A. Ralph Paul.

Q. Is he an experienced oil and gas auditor?

A I don’t know

Q. You don’t know?

A. I don’t know of his qualifications.

Q. I believe you told us on discovery that he had little

oil and gas experience, do you recall that?

A. I think that is true.

Q. Now, did your Department have an oil and gas au-

diting section?

A. No.

Q. Have you read any books on oil and gas accounting

or have you prior to the audit of Humble read any books

on oil and gas accounting?

A. As I stated, there were various books in the library

which were available. I don’t know how much I looked at

one book, probably just, you know, to get an overall re-

fresh—

Q. Look at the inside cover of Exhibit 11-11. Are these

the books you are referring to?

A. 60

A. I believe these are the books that are in our lh-

brary, yes.

Q. And I believe you indicated on discovery that you

may have glanced at the books by Mr. Miller and federal

income tax of oil and gas?

A. I might have looked at both of them; I’m not cer-

tain.

Q. I believe you told us on discovery that you read no

other books or articles prior to the Humble audit?

A. Well, the books are available. I am not positive of

every procedure I took before I went down to Houston,

but they were available in our library and I am sure I

glanced at one or the other or both.

Q. And do you recall my questions on discovery exam-

ination in conne:tion with these books?

A. No.

Q. I refer you again to the examination of you that I

conducted on January 15th, 1974, and specifically to Page

22 of that examination. ‘‘Did you examine any books,

articles or the like in connection with the taxation of

multi-state corporations ?’’

I’m sorry, I’m on the wrong page. It’s Page 21. ‘‘In

connection with your oil and gas audits, Mr. Sheridan,

what books have you read on oil and gas accounting or

related matters? Answer, I believe I looked at the book

that is called, I think Oil and Gas Accounting. I believe it

is listed on that list of books, that single sheet.’’ And then

I state, ‘‘Let the record show that you are identifying the

Miller book.’’

A. Okay.

Q. Then, ‘‘Question, But at the time you were con-

ducting the audit of Humble, this is the book you exam-

ined? Answer, I think so. I just glanced at it. Question,

You didn’t read it as such? Answer, No, I did not. Ques-

ee ee tt

ones Con

A. 61

tion, Would you say you spent any considerable amount

of time on that? Answer, No, no. Question, were there

any other books or articles or the like that you examined

in connection with your audit? Auswer, I don’t believe so.”’

Now, this was the testimony that you gave under oath

at the time?

A. Yes.

Q. And you believe that to be correct?

A. Yes.

Q. I take it then that you had not read at that time a

book by the authors of Altman and Kiesling entitled Allo-

cation of Income and State Taxation?

A. I believe I had read that book before then. We have

that book in our library.

Q. And you read it before when?

A. Oh, any time between 1963. I have looked at that

book. We have various books on income tax and allocation

of multi-state companies.

Q. And you were not testifying correctly under oath

when I asked you that question?

A. You asked me what I read before I went to Houston.

Now, are you asking me what I know—of what books or

what book I read to go to Houston or just prior to

Houston?

Q. I think the question was asked both ways actually.

I think the answer was the same.

Did you examine the Altman and Kiesling book in con-

nection with the audit of Humble?

A. No, I was familiar with that book prior to going

down to Houston. I had read other books on multi-state

operations.

Q. Did you use that book in connection with the Humble

audit?

A. No, I had read it.

A. 62

Q. Had you read that article in Houston entitled the

‘‘Unitary Concept of Allocation of Income’’ published in

1960?

A.” (re.

Q. Have you ever heard of that?

A. No.

Q. Did you ever read miything written by a Mr. Allvin?

A. Yes.

Q. Had you at the time of this audit of Humble read

anything by Mr. Allvin?

A. No.

Q. Now, do you recall at the time of the discovery

examination my request that you provide us with informa-

tion on all books related to oil and gas taxation that had

been used?

A. I think I did.

Q. Well, then—

A. I didn’t have any books.

Q. Then you are saying that you did not use the Kies-

ling book, the Altman and Kiesling book at the time?

A. I never said that. I said I was familiar with the

contents of the book. I had read the book sometime be-

tween 1963 on. I had looked at the book.

Q. But you did not respond when you were under oath

before and the question was propounded to you, what

other books on the subject had you examined? You did not

say anything about that book.

A. I don’t remember. Is it in there? Is it in the dis-

covery?

Q. I read you your answer that you didn’t examine

any books.

A. I read many books since 1963.

Q. When you were testifying under oath at the time—

A Since I was with the Department I was under the

impression that you were trying to find out or obtain—

\ aPD

A. 638

Q. I think you can answer the question yes or no?

A. Prior to going to Houston, had I ready any books

prior to going to Houston?

Q. I would like to read from Page 22 of the examination

identified before. ‘‘Question, did you examine any books,

articles or the like in connection with taxation of multi-

state corporations? Answer, Well over the years I have

looked at various books, you know, we have CC Series,

Prentice-Hall Series, and we have various tax theories that

I have looked at from time to time when necessary. I think

I have looked—we have books in our library called, I think,

Taxation of Multi-State Operations or something. I have

looked at various books like this, yes. Question, Did you

study any of these books in connection with your audit of

Humble? Answer, Of Humble? Question, Yes. Answer,

No.’’

Now, is that correct?

A. Iwas telling you right there I had read these books,

but I did not look at them specifically to go to Humble.

Q. I take it that you did not remember the Altman and

Kiesling books at the time?

A. I believe I said right there I read numerous books.

Q. But you did not read that in connection with the

Humble audit?

A. No, I didn’t.

Q. And you did not consider that book in connection

with the Humble audit?

A. Correct.

Q. You don’t remember what that book may have said?

A. Iam familiar with the book.

Q. But in connection with that audit, you didn’t refer

to that book?

A. No.

Q. Now, what, if any, use did you make of Longhorn’s

paper in connection with the Humble audit? I am referring

to Exhibit 12-B that is in front of you.

A. 64

A. Well, since we had a prior audit which had gone

into this in much more depth, I did not spend a lot of time

using Mr. Longhorn’s paper as any kind of a guide.

Q. Your testimony is that you did not ask the question

set forth in the Longhorn memo?

A. Correct.

Q. And that Mr. Longhorn’s paper is supposed to be

a guideline for auditing multi-state companies, I take it?

A. It’s a guideline available to the auditor, yes.

Q. And your testimony is that you did not really use it?

A. No.

Q. Who was the supervisor that made the assignment

of the Humble audit to you?

David Garno.

And what was his position?

Fuel audit supervisor.

And who was his boss; who did he report to?

Carl Hoel.

And who was Mr.—

Wait. At that time back when I did the audit?

That’s right.

I think it was probably Mr. Leidiger then.

But you are not sure, I take it.

Well, it was one or the other that was the director

of the section.

Q. I believe in January you told us it was Mr. Hoel.

What’s your current opinion?

A. One or the other.

Q. Do you know what positions these two gentlemen

held at the time?

A. Yes. Mr. Hoel followed Mr. Leidiger. That was the

section.

Q. And what position did Mr. Leidiger move on to?

A. I think he was a deputy to the secretary of revenue.

POPOPOPOoOPOo

ee ee Mee

A. 65

Q. I believe you told us in January he was the director

of field operations. Which is correct?

A. Well, he was also the director of field operations.

He spent I think a year or so as assistant to the secretary.

I mean, these can be fully explained if you want to know

exactly who was where at a particular time.

Q. Now Mr. Kaspar, who is the author of that paper

we referred to, I believe you said he had conducted the

prior audit of Humble Oil and Refining Company?

A. Yes.

Q. What was his position at the time you were as-

signed to the second Humble audit?

A. Well, he went from field auditor at Madison to I

believe reviewer within the section and then to, I believe

conferee within the section, and then to office audit super-

visor, all within the section. So during this period he was

in Madison in one of those capacities.

Q. And not related to the oil and gas audits particu-

larly and your audit?

A. I don’t believe he was even a field auditor then.

I think he was in one of the three supervisory capacities.

Q. Now the course of your audit of Humble did you

consult with Mr. Garno?

A. I am not certain.

Q. Did you consult with Mr. Kaspar prior to initiating

the audit?

A. Not on anything specific.

Q. Is your answer no, you didn’t?

A. I am not certain.

Q. What instructions did you get at the time you were

assigned the audit? |

A. Just to make the audit.

Q. Were there any written instructions as to how to

conduct the audit; what year to cover or anything like

that?

A. 66

A. Well, yes. They would have sent me the returns for

1965 to 1968 and they would have sent me the prior audit

work papers and the prior audit reports. This is custo-

mary.

Q. Now I show you a document out of Exhibit 5 that

is sub-numbered S-4 and it’s the last page of that S-4 part

and ask you to identify what that document represents.

A. Well, that’s the letter that came from Mr. Garno

when he sent the Humble file to me for examination.

Q. And that’s all that came with it?

A. Yes. But he says he sent the income franchise

returns. I believe I have the sales and use returns. I have

the withholding returns and I also had the prior work

papers of this corporation.

Q. And so with this departmental correspondence you

received the work papers of the prior audit?

A. Yes.

Q. Now those work papers are the two voluminous

documents that have been admitted into evidence here as

Exhibits 2 and 3; is that correct?

A. Yes.

Q. . Now did you get any other instructions at the time

“ you were assigned the audit beyond the one-page depart-

mental correspondence we have just discussed?

A. No. eas

Q.. No other instructions?

A. No.

Q. Now what use did you make of the prior audit work

papers, that is Exhibits 2 and 3?

A. Well, the first thing I would have done is look at

the whole set to kind of get a feeling of what went on

during that examination, to get a general feel of Humble.

Q. Is it your statement that you used those papers as

to model for your audit?

A. That’s along with the paper presented by Mr. Kas-

par.

Ie

Sa SEE

A. 67

Q. Those were your guidelines?

A. Yes.

Q. I take it you were aware that Humble paid an

assessment as a result of that prior audit and did not con-

test the assessr ent through to a hearing in the Wisconsin

Tax Appeals Commission?

A. Yes.

Q. I take it you would also acknowledge that assess-

ment was paid under protest expressly reserving the

issues and without agreeing to other than pay the money?

A. They wrote that in a letter.

Q. How much time did you spend auditing Humble?

A. You mean time at Houston?

Q. Well, I think I already asked you that. How much

time total did you spend?

A. Well, I believe I say here 32 days.

Q. That’s working days?

A. Yes.

Q. Did you consult with Mr. Kaspar during or after

the audit?

A. I am not certain. |

Q. But you followed the pattern of his working papers?

A. Yes.

_ Q. I believe that you told us on discovery that during

the course of your audit you got everything that you asked

for from the taxpayer?

A. I believe so. I did make the point I didn’t have the

organizational chart in there and I had to question—I

didn’t mark it off, so I don’t know if I didn’t get it or

whether I didn’t pursue it. But other than that I feel—

Q. You don’t have any record, though, that you asked

for it? .

A. Well, I have, I believe, in one of my notes, I have

the questions there, organizational charts; and I don’t

happen to have it in my work papers. I did get the photo-

A. 68

copies of those regions and I thought I asked for organi-

zational charts at the same time, But other than that I

am sure I was furnished everything I asked for.

Q. And I believe you acknowledged in discovery that

you had got everything that you were sure you asked for?

A. With the exception of the one item.

Q. And I believe you also acknowledged that you were

not refused the right to speak to anyone that you requested

to speak to?

A. As far as I know.

Q. Now did you make an examination of Humble’s tax

returns filed with the State of Wisconsin on a separate

accounting basis?

A. No.

Q. I believe you testified at the discovery proceedings

that you accepted the sales as reported with only a minor

adjustment ?

A. Yes,

Q. And I take it then you were satisfied that they re-

flected the gross revenues from Wisconsin activities?

A. Yes.

Q. And I believe you said at the discovery proceedings

that you did not check the Wisconsin cost of sales?

A. Correct.

Q. Now you were following Mr. Kaspar’s pattern and

I take it then you knew that he had traced the cost of

sales and found no basis to challenge the recorded figures?

A. I am not certain as to what depths Mr. Kaspar

went on that.

Q. I believe you said that you did not check the operat-

ing and overhead expenses?

A. Correct.

Q. Then you obviously have no basis for disputing the

accuracy or correctness of the reported figures?

oe ae ena

A. 69

A. Since I determined it was a unitary company, I did

not need to know separate accounting data. Therefore, I

did not look at it.

Q. But you have no basis to dispute the figures the

taxpayer reported for in fact the Wisconsin expenses?

A. I did not examine those figures.

Q. Then I take it you wouldn’t know which of those

expenses were directly recorded and which were allocated? .

A. No. ‘ :

Q. Then I take it you have no way of saying that

Humble’s Wisconsin operating result as reported on the

basis of separate accounting on the returns filed with the

Department do not truly reflect the activities of Humble

in Wisconsin during the years in issue?

A. I didn’t accept the manner in which they filed, there-

fore I didn’t examine the way that return was prepared.

Q. So you have no way of saying that the results as

reported are not truly reflected because you didn’t examine

them?

A. I don’t know what those figures purport to show be-

cause I didn’t examine them.

Q. You have no basis, though, to challenge any par-

ticular figures?

A. The only one I looked at was sales. The remainder

of the figures on the return I did not examine, so I don’t

know anything about those figures.

Q. So really you made no determination as to whether,

if separate accounting were deemed an appropriate re-

porting method, the separate accounting returns as filed

properly reflected Humble’s Wisconsin income?

A. No, in my view the company was unitary, therefore

I would have used apportionment and I would not have

spent the time on separate accounting.

Q@ That is not responsive to the question. I said, you

made no determination as to whether the separate account-

A. 70

ing figure, assuming separate accounting was deemed ap-

propriate, correctly reflected Wisconsin income?

A I did not make that determination.

Q. Now I believe in your audit you made a decision

to treat the petitioner’s natural gas income of its Explora-

tion Department different from the way Mr. Kaspar

treated it, do you recall that?

A. Well, I might have made a refinement in the method

in order to determine the net income which was natural

gas income.

Q. Do you recall treating the gas system sales and the

gas lease sales as income allocable to situs?

A. What kind of sales?

Q. Gas system sales and gas lease sales.

A. We treated those as sales following situs.

Q. And you treated gas plant gas sales as apportion-

ment, is that correct?

A. Yes.

Q. Now do you know what happens to the gas at a gas

plant?

A. From what I have been told by people from oil

companies, apparently very little natural gas is in effect

dry gas, it can be even a gas-oil combination well, it goes

into this gasoline plant which I think takes out impurities

and also extracts what they call gas liquids, and I think

then the remainder is dry natural gas. .

Q. That is your understanding of what happens at a

gasoline plant?

A. Yes.

Q. Do you understand that there is any change in

molecular structure of the gas?

A. I don’t know about that.

Q. You don’t know?

A. No.

Rh eg a ee ee Oe ad

A. 71

Q. Do you know what happens at the separator at the

well head? esi

A. My impression was that that was to take off mainly

waste——water—waste material, I thought. I think that

is what it was.

Q. But you are not sure?

A. No, I am not sure.

Q. If there was no conversion of natural gas to new

products in either the separator or the gas plant, then

would you consider the income from sales after either of

these steps to be allocable income or apportionable income?

A. If there were no what?

Q. If there were no conversion of the natural gas to

new products in the gas plant or in the separator?

A. Well, if ‘here were no manufacturing activity, we

would have considered this gas yet gas at the situs.

Q. And you would consider manufacturing activity as

you put it to be something that converts the gas or the

oil into a new product?

A. Yes, or its manufacturing activity, I think that is

what a gasoline plant is, it is a manufacturing plant. It is

manufacturing activity.

Q. What does it manufacture?

A. Well, liquids, it dries out the gas, I don’t know

what else it does. It is a fractionization process.

Q. I believe you testified you didn’t know whether

there was any molecular change in the gas that came out—

A. Tf fractionization changes the molecular structure,

I don’t know. I have been told a gasoline plant is a frac-

tionization process.

Q. I take it you don’t have any direct knowledge on

this at all?

A. No, this is what people have told me.

Q. Who told you that?

A. Various people from all oil companies.

A. 72

Q. Anybody from Humble tell you that?

A. I am sure somebody must have talked about it. I

had to ask for that information, so we must have talked

about it.

Q. Who would you have talked to with Humble that

you would indicate would have told you that?

A. Any one of the people in the Tax Department that

I talked to.

Q. But you don’t know who? :

A. Ican’t pinpoint a specific time that I talked about it.

Q. But you don’t know the individual’s name either?

A. No.

Q. Now if none of the natural gas of the E and P De-

partment reached the refinery for conversion to new prod-

ucts, would you consider the income from sales after a

gas plant or after a separator to be allocable or apportion-

able?

A. I would have to know what you are talking about,

what activity at this gas plant. It seems to me the sepa-

rator—that is close proximity to the well, and the sale

can be made at that point, and I believe we have allowed

those as nonapportionable following situs. I think we only

had the two situations, either the sale in effect at the lease

or the sale after the gas plant, which is very nominal

amount of gas, as I recall.

Q. Well, now, if none of the natural gas reached the

refinery for conversion to new product, wouldn’t you con-

sider that that should have all been treated as situs in-

come?

A. I think we would have.

Q. .Whether or not it went through a gas plant?

A. No, I would want to know what happened when it

went to the gas plant.

ES BLT

A. 73

Q. And you really don’t know what happened when

it goes through a gas plant, I take it?

Mr. Timken: We will take another ten minutes.

(Recess)

Mr. Timken: Back on the record. You may continue,

Mr. Ragatz.

Examination

By Mr. Ragatz:

Q. Mr. Sheridan, I believe the distinction that you made

in your testimony on January and that the department

makes is that the income from an oil well is recognized

as similar to that of a mine for purposes of the require-

ments of Section 71.07 Sub 1, that income be allocated to

situs I believe to the extent that it’s sold off at or closed

to the well head, is that a correct statement?

A. To outsiders, yes.

Q. And the statute I believe says income that is de-

rived from the situs operation is to be allocated as opposed

to apportionment?

A. Yes, we call it nonapportionment.

Q. Well, there is no reference, is there, in the statutes

to a distinction between raw crude oil and refined crude

oil as to what is situs income?

A. I don’t believe in the statutes.

Q. There is no reference in the manual which is Exhibit

11-10-A to that distinction, either, is there?

A. I don’t believe so.

Q. And there are not published rules and regulations

as to that distinction either, are there?

A. Are you talking about the difference between raw

erude oil—

Q. And the distinction that you draw that raw crude

oil is income allocated to situs and refined crude oil is

apportionment income?

A. I don’t believe there is any published rule.

A. 74

Q. And the manual that you—a portion of which you

have in your hand is not a published document anyway,

is it.

A. I don’t believe so.

Q. In making a definition of that distinction I should

have said the distinction is between raw crude oil an‘

crude oil that goes through a refinery. That is where you

draw the line, I beiieve, isn’t it?

A. Yes.

Q. And as I understand it, the Department takes the

position that if the crude oil goes to that refinery, that

it is no longer considered as income from mining allocable

to situs?

A. Correct.

Q. And the Department refuses to recognize the value

of the crude oil at the well head that is transferred to the

refinery as income from situs?

Correct.

Instead it includes this apportionment income?

Yes.

Now, who originated this distinction?

It’s before my time.

You don’t know?

No, I don’t know.

And there are no published rules or regulation:

whee explain it?

A. I don’t know of any.

Q. Now, you applied an apportionment formula in the

course of your audit that differed somewhat from the three

factor statutory formula, didn’t you?

| ee

Q. Is your testimony that the formula that you applied

is identical to the three factor statutory formula?

A. Yes, it is.

‘OPOrPOPOD

;

A. 75

What is the denominator of the formula you used?

Total company sales—of which factor?

I am talking about the denominator of the fraction.

Of the sales factor?

No, I am talking about the overall formula.

The formula is made up of three factors, the ratio

of Wievsiinin tangible property to total apportionment

property and the cost of manufacturing and sales.

Q. And then you combined these three into one?

A. One percent, yes. .

Q. And when you made the calculation to combine this,

what did you use as a denominator in your fraction?

A. Well, we weighted cost of manufacturing.

Q. The statute doesn’t say anything about weighting,

does it?

A. I don’t believe the statute says it.

Q. And the statute calls for three factors of which

would make a denominator of three, isn’t that correct?

A. In a normal situation, yes.

Q. And you used a denominator of something less than

three?

A. Yes.

Q. And there are no rules or regulations that have

been prescribed and published explaining weighting?

A. I think it does in the Kroger case. It does in the

old rules of the Department.

That are no longer—

Not in print.

—in effect and print?

Right. It is in the Kroger case.

But the Kroger case is not a rule?

No.

And the Kroger case was not prescribed by the

Department, I take it?

A. TI don’t understand your question.

perere

FS OrPOoroOrO

A. 76

Q. The statute says that rules and regulations pre-

scribed by the Department. I trust the Department is not

prescribing the Tax Appeals Commission decisions?

A. I don’t think I understand your question here. The

Kroger.company is a case.

Q. In response to my question as to whether or not

there are rules and regulations, you mentioned the Kroger

case which is really unresponsive. The Kroger case is not

a prescribed rule or regulation, is it?

A. Correct.

Q. Now, in the application of the factors in your audit

you didn’t really use the cost of manufacturing factor,

did you?

A. Yes.

Q. Now, there wasn’t any manufacturing by Humble

in Wisconsin during the years in issue, was there?

A. No.

Q. So that the numerator of that portion of the three

factor formula would be zero?

A. Right.

Q. And the denominator would be the total of all costs

of manufacturing company-wide?

A. Right.

Q. And the denominator, when you combine the three

factors, would be three?

A. No, because we have weighted that factor.

Q. And what did you use to arrive at a weight?

A. We used a ratio of apportionment sales less sales

of purchased manufactured products of other vendors.

Q. But you used the sales figures, didn’t you?

A. This was just in lieu of partly having manufactur-

ing figures.

Q. But you did not use the cost of manufacturing

figures as such, did you?

A. No.

re Sale al Ae cal a cl 0 = et rE

rs —erses

A. 77

Q. So in effect you used two sales factors of the three

factors in the formula?

A. No.

Q. Now, in the course of the barrel formula aspect of

your approach, you arrived at certain assumptions, and

one of these assumptions is that the return on each dollar

of sales is equivalent, is that not correct?

A. In the determination of the income of the E and P

Department, yes. In order to try to ascertain income for

this nonapportionment sales, yes, we used that assumption.

Q. Then, therefore, your assumption would also include

the facts that the cost of sales would be equivalent for

each dollar of sales, true?

A. I guess so.

Q. And you also used the assumption that for each

dollar of investment you get an equivalent dollar of return?

A. I don’t know that.

Q. Well, should I refresh your recollection from the

discovery? I refer you again to the discovery deposition

taken of you on January 15th at Page 76 of that transcript.

‘‘Question, I understand that. What I am driving

at is, you are using a relationship of income—of types

of income and interpolating that into investment in

property for purposes of determining the tangible

property factor, so that you are assuming that for

every dollar of net income an equivalent amount of

investment, relative investment is made in property?

Answer, Well, let’s say this is the method we are

using to try and isolate that nonapportionable prop-

erty.’

Also on Page 77,

‘‘Question, Again you are back to the assumption

that for every dollar of net income an equivalent dol-

lar investment is involved, and that some activity

does not cost the company more dollars of invest-

A. 78

ment than other activity? Answer, I don’t think

that that has ever been established to an auditor and

that is why this method has been used. Question,

But that is your method? Answer, Yes, this is it.’’

Does that refresh your recollection? ,

A. We remove nonapportionable property based on

that income ratio so if you want to say that’s a dollar of

net income to dollar of investment—

Q. In other words, you take the total property and you

say that 60 per cent of this is allocable of the net

income of the E and P Department is allocable, we are

going to remove 50 per cent of property and only use

the 40 per cent in the property factor for apportionment,

is that correct?

A. We are talking about 60 per cent of the E and P

property, not the total company?

Q. That’s right.

A. Yes, we are doing that.

Q. But you are dividing property between that which

you could consider in the factor for apportionment and

that which you would consider relating to allocable in-

come by multiplying a net income percentage?

A. Within the E and P Department, yes.

Q. And by using that percentage you are employing

the assumption that for each dollar of property invest-

ment you produce the same equivalent dollar—of the same

equivalent percentage of net income?

A. I don’t think that we have that assumption. This

was a matter in which to remove the property which

we say pertains to producing nonapportionable income

and in the absence of any other information this was the

procedure that was used.

Q. This is the way you do it?

A. Yes, it is.

A. 79

Q. Now at several places in the course of the calcula-

tion of your barrel formula, you employ the step of multi-

plying one ratio by another ratio, don’t you?

A. Where specifically do you mean?

Q. Well, I am asking the question. Do you or don’t

you?

A. I can’t answer if I don’t know where you mean

within the audit.

Q. Well, look at your working papers. We went over

this in January. I don’t want to delve too much on it, but

you acknowledged at the time that this procedure of multi-

plying a ratio by a ratio Was used in several points in your

calculation. Do you recall that?

A. No.

Q. Well, let me refer again to the discovery deposition

that I have previously mentioned, this time to Page 74,

I believe.

‘‘Question. Now then, you took the nonapportion-

ment percentage which the footnote says was deter-

mined from a crude oil barrelage data? Answer. Yes.

Question. And you multiplied one percentage times

another percentage? Answer. Yes. Question. A ratio

times a ratio? Answer. Yes.’’

‘I believe you also referred to that in your testimony at

Page 75 and again at Page 77. Does that refresh your

recollection?

A. I would like to look at the specific part of the audit

report that we are talking about.

Q. You have the audit report in front of you.

A. No, I have the work papers.

Q. Well, the audit report is right here that you are

welcome to. But I am more interested just in the con-

cept. Do you acknowledge or do you deny that at several

places in your barrel formula calculation you are multi-

plying a ratio by a ratio?

A. 80

A. Well, the barrel formula could be worked out going

ratio by ratio and come up with the same end product.

Q. But it wasn’t, was it? You did multiply a ratio by

a ratio?

A. In the audit, yes.

Q. Yes. And you were testifying truthfully on the

deposition when you acknowledged that?

A. We did do it. It can be worked the other way

without it, though, and come up with the same answer.

Q. Now this barrel formula is a very complicated cal-

culation, I think you would agree?

A. Yes.

Q. Are there any prescribed and published rules and

regulations explaining this barrel formula method?

A. Not that I am aware of.

Q. Are you familiar with the term posted field price?

A. Well, I think it to be the price that crude is bought

and sold at.

Q. Between third parties?

A. In a given area, yes.

Q. And I believe you indicated that you note that Hum-

ble uses posted field prices for recording transfers be-

tween its E and P function and its refining function?

A. Somebody at Humble must have told me that.

Q. But you don’t have any reason to doubt it?

A. No.

Q. Now I believe you have Mr. Kaspar’s paper in

front of you?

A. Yes. Yes.

Q. Do you recall his statements on posted field price?

A. Offhand—Okay. What’s the question?

Q. Do you accept the Kaspar paper as the policy of the

Department on the treatment of posted field prices?

A. I think that’s what it is.

A. 81

Q. Are you familiar with the Fisk formula?

A. No.

Q. Are you familiar with the publication named Platt’s

Oil Gram?

A. Vaguely.

Q. Do you want to describe what it is?

A. I thought it was a weekly newspaper or some pub-

lication which gave—I thought it was crude oil values, but

maybe it’s refined values.

Q. You don’t really know?

A. No, I don’t really know. I don’t think I have ever

seen one.

Q. Do you have any information as to the use of

Platt’s Oil Gram in connection with a determination of

prices between refining function and a marketing function

by an oil company?

A. No.

Q. You do know that Humble was organized by func-

tional departments?

A. Yes.

Q. That there are separate functional department for

exploration and production, for refining, for marketing?

A. Yes.

Q. Do you know that there were separate functional

departments for marine, land management, minerals and

coal and shale oil? |

A. Yes.

Q. Now how did you treat the land management, the

minerals and the coal and shale oil departments on their

audit?

A. They were considered a part of the apportionable

income.

Q. And just what do these functions do?

A. I am not certain.

A. 82

Q. You are not certain?

A. I think coal and shale oil was investigationg the

possibility of obtaining oil from the coal and shale oil.

Q. Do they process the coal and shale; is there a

manufacturing company?

A. I don’t know.

Q. Do you recall discussing this at the discovery

proceeding ?

A. No. Well, yeah, I think we mentioned these depart-

ments but I think I mentioned at the time I didn’t re-

eall exactly or specifically what those particular funce-

tions did. They were left in as apportionable income.

Q. They were not treated as situs operations?

A. No.

Q. And you don’t know whether or not minerals and

land management, coal and shale oil are or are not situs

operations?

A. No.

Q. They are extracting raw materials from the earth,

aren’t they?

A. I am not certain.

Q. You really don’t know, do you?

A. That’s right.

Q. Do you recall indicating on the discovery examina-

tion that it might have been an oversight on your part not

to treat land management as a situs operation?

A. May have. I would have to investigate the whole

area in order to determine that.

Q. Why didn’t you investigate it?

A. I don’t know.

Q. And if it were determined that these were situs

operations, then they will be erroneously included in ap-

portionable income, wouldn’t they?

A. Yes.

pete or 2 eee

A. 83

Q. In the course of your audit, Mr. Sheridan, did you

attempt to make any check as to the validity and integrity

of the accounting for transfer prices between Humble’s

& and P function and its refining function and its mar-

keting function?

A. No.

Q. You made no test to that at all?

A. No.

Mr. Ragatz: I have no further questions.

Mr. Timken: You may step down, Mr. Sheridan.

(Witness excused. )

Mr. Timken: You may call your next witness, Mr.

Ragatz.

Mr. Ragatz: The petitioner calls Mr. Kurt Kaspar.

Mr. Timken: Adversely?

Mr. Ragatz: Adversely. Thank you.

Mr. Schapiro: Our objection is a continuing one.

Mr. Timken: Objection overruled. Same ruling. Mr.

Morris, do you want to put that in a motion or not?

Mr. Morris: No, I don’t think I will.

Mr. Timken: Very well.

Would you come forward, please.

KURT KASPAR, JR., called as a witness, having been

duly sworn under oath, testified as follows:

Direct Examination

By Mr. Ragatz:

Q. Would you state your full name for the record,

please?

A. Kurt Kaspar, Jr.

Q. Where do you live, Mr. Kaspar?

A. Monona, Wisconsin.

Q. How old are you?

A. Forty-six.

A. 84

What is your occupation?

Accountant.

By whom are you employed?

Wisconsin Department of Revenue.

And for how long have you been so employed?

Since 1956.

What did you do prior to that?

Served in the U. S. Navy.

And prior to that? 7

. Immediately prior to beginning in ’56 I was a stu-

dent at the University for a short while, I think one

semester. Prior to that was in the service.

Q. And so from the time of graduation from college

to the time you entered the service for the Department

of Revenue you had no other accounting-related employ-

ment?

A. That’s correct.

Q. What positions have you held with the Department

of Revenue?

A. Office auditor in the corporation section—all of this

in the corporation section. Office auditor, field auditor,

field auditor reviewer, conferee, office audit supervisor,

motor field tax supervisor, field audit supervisor in the

field audit section.

Q. And what position did you have during the years

1966 through 1968?

A. I was a field auditor in 1966. In 1967 I became

audit reviewer and in 1968 I became conferee of the cor-

poration section.

Q. And what is your present position?

A. Field audit supervisor of the field audit section of

the Audit Bureau.

Q. Quickly give us your educational background?

A. BBA from the University of Wisconsin.

OPOFrOPOPS

>

}

ee a en ee

A. 85

Q. And there you had the basic course in economies re-

quired for the degree?

A. Yes.

Q. Any other courses in economics?

A. Not that I recall.

Q. Any graduate courses or seminars in economics?

A. Not that I recall. I don’t think so.

Q. And no other economic training? _

A. No formal training.

Q. If I remember correctly you are at CPA?

A. Yes.

Q. Do you have any other professional designations?

A. No.

Q.

Have you ever practiced accounting other than with

the Department of Revenue?

A. No.

Q. And you have never had any other auditing experi-

ence except with the Department of Revenue?

A. As I mentioned in the deposition, I think I audited

the books of the Officer’s Mess aboard ship.

Q. We will note that.

You were the assigned auditor on the initial audit of

Humble for the years 1960 through 1964?

A. Yes.

Q. When was that audit assigned?

A. I don’t know exactly when it was assigned. Prob-

ably in the early months of 1966.

Q. And when was the audit completed?

A. It was begun in April, on April 4th of 1966; and

as I recall the report was issued on December 9th of 1966.

Q. Was this your first oil and gas audit?

A. No. It was the first audit of a major—so-called

major oil company I would say, yes. There was another

company that I—I don’t recall if it had an Exploration and

Production Operation or not.

A. 86

Q. I believe on the discovery deposition you refused

to identify that Company and you still refuse?

A. I didn’t refuse. I would like to answer it but we

are prohibited from doing that.

Q. By whom?

A. The law.

Q. And what other audits did you have after the Hum-

ble audit?

A. What other audits, by name?

Q. Well, first by number.

A. I don’t have any idea. Finished Humble in 1966

and, as I said, I became the field audit reviewer in 1967

toward the end of the year. So, I am—I imagine there

were several.

Q. Do you recall telling us on the discovery deposition

that you audited two other oil companies after Humble?

A. Yes.

Q. Is that a correct statement?

A. Yes, along with several other multi-state cor-

porations.

Q. I take it your current duties have nothing to do with

oil and gas producers?

A. Up to this point, yes.

Q. What contact with oil and gas accounting have you

had since the completion of these oil and gas audits we

have just mentioned?

A. None.

Q. Now, at the discovery deposition you refused to

identify these two companies that you audited after Hum-

ble. Do you still refuse?

A. No, I don’t refuse. I would like to answer but I

am prohibited from answering by the law.

Q. And do you refuse to give us the basis on which

these companies were assessed?

A. 87

A. No. I think I could tell you that. They were as-

sessed on the same basis as Humble, as are all major oil

companies.

Q. Do you refuse to give us the basis on which they

had reported their income?

A. The other companies?

Q. Yes.

A. I think they all—Humble is the only company that

refuses to file an apportionment so that they used appor-

tionment.

Q. Are you familiar with the Union Oil case before the

Tax Appeals Commission?

A. No.

Q. You don’t know then that they are making a protest

to apportionment similar to Humble’s?

A. I don’t know that as a fact, no.

Q. Will you at this time provide us with copies of these

other audits so that we can examine and determine whether

your statements there were assessed on the same basis as

Humble are correct?

A. Which other audits?

Q. These other two audits that we have mentioned that

you made.

A. No, I don’t refuse. I would like to but I am pro-

hibited from doing that by the law. I think that would be

very enlightening.

Q. Prior to the Humble audit or actually the audit of

the first oil company, what multi-state audit training had

you been given by the Department?

A. Similar to Tom’s. When you begin with the De-

partment you are put through a formal training course

for several weeks. Then you are assigned to a senior au-

ditor who has a great deal of experience in auditing the

bigger companies; and you work with those senior auditors

for at least a year so that you have a year of training, a

a year plus of training.

A. 88

Q. What formal training have you had by the Depart-

ment?

A. In auditing multi-state corporations?

—Q. Yes.

A. No formal training in the formal classroom train-

ing other than the first several-week course.

Q. Well, with the prior witness I talked about the paper

that you presented in October of 1968, which is admitted

herein evidence as Exhibit 11-11. When was that paper

prepared? :

A. I would say very shortly before the date of pre-

sentation.

Q. How many oil company audits had you prepared prior

to the preparation of that paper?

A. Those that we talked about, the two subsequent to

Humble and those that I have done before, which I think

was the only one, so probably four.

Q. Now, the paper is sitting in front of you there on

the wtiness stand, and I ask you to open it up and thumb

to the back and look at the schedules that are attached to

that paper, if you would, please.

A. Any particular one?

Q. Where do the figures that appear on these schedules

come from?

A. Which schedule?

Q. Well, let’s start with Exhibit E, Page E-1.

A. As I recall, when I prepared this paper I used the

combination of my imagination and numbers from one of

the companies that I had audited.

Q. Could perhaps that eompany have been Humble Oii

and Refining Company?

A. Yes, it could.

Q. In fact, it was, wasn’t it?

A. I think it was.

A. 89

Q. What familiarity did you have prior to the Humble

audit with the Department’s manual which has been ad-

mitted here in evidence as Exhibit 11-10 and a couple of

chapters which are before you on the witness stand?

A. I had read and studied it.

Q. Including its definitions and its explanations of the

mechanics?

A. Iam sure | had, yes.

Q. And had you had any discussions with other em-

ployees of the Department concerning the techniques for

auditing oil companies?

A. I suppose with may supervisor at the time prior to

doing the audit. I may have called—talked to some other

auditors who had done oil companies.

Q. Would you say it is a fair statement that an oil

company audit is a new and different experience from

other company audits?

A. It is a new and different experience, yes. Every

audit of a multi-state company is a new and different ex-

perience. They are all different.

Q. But the application of the barrel formula and the

manner in which you apply it is a very complex procedure,

would you agree?

A. I don’t think so. The barrel formula is rather sim-

ple to an accountant who is accustomed to working with

numbers and a percentage, then it really is quite simple.

Q. Well, maybe we will give you an opportunity to

explain it to us and the Commission at some point. Prior

to the Humble audit, what books had you read on the

oil and gas companies and/or taxation of the applicable

and—the applicable concepts that relate to multi-state

corporations as applied to oil and gas companies?

A. That is a long sentence.

Q. Yes.

A. I don’t think—

A. 90

Q. Do you understand the question? Otherwise I will

re-state it.

A. Well, you talk first of oil companies and then about

all companies. I suppose—I don’t recall reading

many textbooks on the computation of income, taxable

income of multi-state corporations other than our train-

ing manual prior to the audit of Humble. Of course we

always read the law and we always read the court cases

and our actions are always based on what the courts have

decided. That is our Bible I think.

Q. Now, in your paper that is Exhibit 11-11 there is

a one-page sheet listing about four textbooks in the inside

cover, and I believe you told me on discovery that those

were books that you may have reviewed in connection with

your oil company audits.

A. I think I did during the course of the audit and

after the audit, and after the field work of that audit.

Q. Were there any other books?

A. Not that come to mind. I don’t think there were.

Q. I believe you told us there were no other books?

A. That’s correct.

Q. Had, at that point, you read the work by Altman

and Kiesling on Allocation of Income and State Taxation?

A. No.

Q. And had you read an article by Mr. Kiesling pub-

lished in Hasting’s Law Journal?

A. No.

Q. Had you ever read anything at that point by Mr.

Fred C. Allvin?

A. I don’t think so. You are going back a long time.

This is eight years.

Q. Well, what training had you been given with the

Department in the concepts of, first, business income in

Wisconsin?

|

A. 91

A. What training had I had in the concept of de-

termining business income in Wisconsin?

Q. Correct.

A. What we talked about, our training course, our

experience as a junior with a senior auditor, and our ex-

perience then in auditing.

Q. Has there been any specific training devoted te the

determination of what is business in Wisconsin?

A. I am sure during the first training course that we

received—there is no doubt—several sessions devoted just

to that topic.

Q. This was the oral training course?

A. The oral training course.

Q. Are there any materials you studied on this?

A. I think there were pass-outs, problems, examples,

what have you.

Q. Are they still available in the Department?

A. I threw mine away a few years ago after the book

came out, after this training course was put in manual

form, I think I disposed of my notes from that course.

Q. At the discovery proceedings we had served a sub-

poena requesting copies of all documents in that area, do

you recall that?

A. Yes.

Q. And to the best of your knowledge were the docu-

ments that were produced all of the documents relating

to that?

A. Yes.

Q. So that what is in the manual constitutes everything

that there is with the Department right now—

A. No, I probably have forgotten to talk about the

auditor’s conferences that are held in which papers are

given, technical papers prepared by auditors who had ex-

perience with given problems. Those also constituto an

available source of information for auditors.

A. 92

Q. Several papers were produced—yours, Mr. Long-

horn’s, and I believe one by Mr. Lins. Are you aware of

any other paper?

A. Certatinly.

Q. On the subject of oil and gas taxation?

A. No. Those are the three I know on oil and gas.

You talk about this being my paper, as you notice, there

are two authors on this. I was one of the authors.

Q. And Mr. Paul was a junior at that time?

A. No. He had audited as much as I had at this point,

maybe more, so he had quite a bit of input into this paper.

Q. Had you received any specific training in the de-

termination of what is a unitary business?

A. Formal training, no, other than our classroom train-

ing, and of course the paper by Mr. Longhorn which was

presented, I think, at a conference prior to the time I be-

gan with the Department, so my only knowledge of that

was to read it, and of course reading all of the court cases

that deal with that issue.

Q. But you had not been instructed by the Department

in the procedure for determination of what is a unitary

business?

A. No.

Q. Had you been instructed by the Department in the

procedure for determining what is an integral part of a

unitary business?

A. No, other than what we talked about.

Q. I believe you testified that you had no oil and gas

accounting training?

A. That’s correct.

Q. And that you attended no oil and gas seminars?

A. I am not quite sure what you mean there. As part

of when I was with the Motor Field Tax Division or unit,

I attended many conferences having to do with oil and gas.

|

A. 93

They were after the paper was written, though, so—

Q. Was that on oil and gas accounting?

A. Not accounting.

Q. Now based upon your experience, are you aware of

any oil and gas companies that have E and P functions

in the State of Wisconsin? E and P activities in the

State of Wisconsin?

A. No, I am not.

Q. And are you aware of any oil companies that have

refining facilities here?

A. Yes.

Q. Who is that?

A. I believe that is Murphy Oil Company.

Q. Are you aware of any others?

A. No.

Q. Have you audited Murphy Oil Company?

A. No.

(Hearing adjourned, 4:25 p.m.)

A. 94

STATE OF WISCONSIN

WISCONSIN TAX APPEALS COMMISSION

Docket No. I-3806

EXXON CORPORATION, (f/k/a Humble Oil and

Refining Company),

Petitioner,

- VS -

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

CERTIFICATION

KAREN A. CHERRY

MINDLA COMINS

LORETTA PETERS,

hereby certify that as the duly appointed reporters, we

took in shorthand the testimony and proceedings had in

the foregoing matter on the 2nd day of October, 1974, and

that the attached is a true and correct transcription of said

shorthand notes and of the whole thereof.

Dated this 2nd day of October, 1974.

Karen A. Cherry

Karen A. Cherry

Mindla Comins

Mindla Comins

Loretta Peters

Loretta Peters

A. 95

TRANSCRIPT OF PROCEEDINGS in the above-en-

titled matter held before the Wisconsin Tax Appeals Com-

mission, in Room 229, City-County Building, Madison, Wis-

consin, on the 3rd day of October, 1974, commencing at

9:45 in the forenoon.

e e &

Mr. Timken: Back on the record. Mr. Kaspar, you

have already been sworn.

KURT KASPAR, recalled as a witness, having been previ-

ously sworn under oath testified as follows:

Examination

By Mr. Ragatz:

Q. Mr. Kaspar, who in the Department originally

formulated that approach to the audit of multi-state gas

companies?

A. The barrel formula?

Q. The whole overall approach including the barrel

formula?

A. I don’t really know. That happened long before my

time.

Q. Now, who is credited with the development of the

methods and procedures of auditing oil companies?

‘A. I don’t know if any one person is.

Q. How about Lins?

A. He was an auditor that audited many oil companies

years ago, as I understand it.

Q. Do you recall telling us on discovery that he was

at least thought to be the leader in the development of this

audit approach?

A. Idon’t specifically recall that, but I could have said

that; that he was one of those that was a leader.

Q. Do you know what his experience was?

A. I think the same as most of us, that he had the

same kind of training and probably worked up from smaller

companies into the larger companies over a period of time.

A. 96

Did you ever train under him?

No, I did not.

Did you ever meet him?

Never met him.

I take it he is no longer with the Department?

No. He is not.

Is he still living?

I think he is deceased for two or three years.

I believe you indicated at discovery that in auditing

Humble you reviewed another set of working papers. Would

you identify the company whose working papers you re-

viewed?

A. I don’t know as I can.

Mr. Shapiro: That has been identified.

The Witness: It was the Continental Oil Company.

By Mr. Ragatz:

Q. And you used the Continental Oil Company’s papers,

as I remember it, as a model for your Humble audit?

A. I never used the word ‘‘model’’. I certainly took

them along and studied them and the barrel formula was

used in the audit so that was the first time I had seen that

formula.

Q. And you had these work papers with you when you

went to Houston to perform your audit?

A. Yes.

Q. Is it a fair statement that your schedules and your

approach is patterned after the Continental work papers

and the Continental audit approach?

A. No, I don’t think that you can say that. The audit

‘approach—lI don’t think that the audit approach was mine.

The manner in which the audit report was put together

was probably patterned somewhat after that audit.

Q. Now, on discovery you declined to indicate the basis

on which Continental had reported its income. Do you still

decline to respond to that question?

OPOoOPOPOo PS

ee

net ee et am ns

A. 97

A. I don’t know. How do you stand in that area?

Frankly, first of all, I don’t recall how they reported it so

I don’t think that I can answer that question. How they

filed their return, I assume is your question. I don’t re-

member how they filed their return.

Q. Did your audit approach on Humble differ from the

audit approach on Continental?

A. The audit approach?

Q. The method you used to arrive at the assessment?

A. Basically I would say it was the same, but expanded

upon. I think the audit of Continental was a much similar

audit in that it didn’t have nearly the activities that Humble

had at that time.

Q. Now, on discovery you declined to respond to the

question of what differences there were in the treatment

of Continental versus the treatment of Humble. Do you

still decline to answer that question?

A. Not if I am able to give you that information.

Mr. Shapiro: May it please the Commission, in its

order, the Commission has decided that information rela-

tive to the Continental Oil Company audit was properly

excluded under the secrecy law. I would like to submit

this at this point.

Mr. Timken: You are objecting to this line of ques-

tioning?

Mr. Shapiro: We object to this line of questioning with

respect to information relating to the Continental Oil Com-

pany.

Mr. Ragatz: If I might be heard on that, the line of

questioning I am pursuing is designed to determine whether

our client was given fair and equal treatment as compared

to this other oil company, which we were told on discovery

was used as a model for the audit of our client, and I

think we are entitled to know that.

A. 98

We are aware of that Commission’s decision on the pro-

duction of the Continental work papers, but I still intend

to preserve the question of whether we are entitled to re-

view that document and examine on that subject, and that

is the reason I am asking the questions at this time.

Mr. Timken: We will take a break for a second.

Mr. Timken: It seems to be that Mr. Ragatz merely

is doing what he did with the first witness and we will

allow him to do that, and these are questions along the

line that you still maintain your answer that you won’t

answer that question, and I think we can do that, and we

will allow him to do it so he can preserve the record.

Mr. Shapiro: Yes.

Mr. Timken: That doesn’t disturb our ruling on dis-

covery, you understand?

Mr. Shapiro: I understand. I think it is appropriate

for counsel of respondent to instruct the witness that in-

formation that might be contained in the Continental work

papers should not be disclosed.

Mr. Timken: That was your position before and still is

your position?

Mr. Shapiro: Yes.

Mr. Timken: ‘Well, you may continue.

By Mr. Ragatz:

Q. Mr. Kaspar, what years were involved in the Con-

tinental audit?

A. I don’t remember, but I think that audit covered

years, several years earlier than the years I was doing

with Humble; as I was doing 1960 through 1974 with

Humble, Continental may have covered the middle years

of the 1950’s.

Q. At least that audit had been completed prior to the

start of your Humble audit?

A. Yes.

adel sw:

22 Pee ena eh LO

ee ee

ml adr sa dite Osher Bice we pn al

A. 99

Continental is a multi-functional oil company?

As I recall it was, yes.

Who was the auditor on the Continental audit?

John Leidiger.

Do you still refuse to provide us with copies of

the audit report and audit working papers on the Con-

tinental audit?

A. Yes, although I don’t know. That question puzzles

me because I really have no control over these papers.

These aren’t mine to give or not to give.

Q. But they were a part of the subpoena that was

served on you by stipulation for respondent upon the dis-

covery examination?

A. They were served on me.

Q. It was in effect served on you and the other wit-

nesses by stipulation and you as agent of the Department

of Revenue would have to respond to the subpoena if the

Commission directed that that was a subject proper for

exercising the power of the subpoena?

Mr. Shapiro: May I say at this point that the Con-

tinental work papers are in the possession of the Depart-

ment and that they are considered to be privileged docu-

ments, it is our position.

Q. Who was your supervisor at the time the Humble

audit was assigned?

A. David F. Garno.

Q. And what was his position?

A’. I believe he was chief auditor of the Corporation

Section.

Q. And who did he directly report to in the chain of

command?

A. John Leidiger at that time, at the time of the assign-

ment of the audit.

Q. And what was Mr. Leidiger’s position?

A. Section chief of the Corporation Section.

OPoPO

A. 100

Q. What instructions were you given at the time the

Humble audit was assigned to you?

A. I don’t recall that there were any written instruc-

tions. Probably verbal instructions since I was, as I said,

in the Madison office where the audit was assigned, instruc-

tions to go down and do the audit, look into the returns

filed, determine if they were fi'ed on a correct basis and to

recompute the income as it should be, if they were in-

correct.

Q. Were you told that Humble was a prime candidate

for change to the apportionment method?

A. I don’t recall being told that.

Q. You don’t deny that, though?

A. I don’t deny it.

Q. Did you confer with Mr. Garno or Mr. Leidiger dur-

ing the course of your audit on Humble?

A. Yes, many times.

Q. On what subjects?

A. Probably dozens, all important subjects. The most

important being what basic method to use to compute

their income; and prior to that, whether or not the company

was unitary.

Q. What instructions were you given as to how to de-

termine whether or not the company was unitary?

A. Well, I was always instructed to follow the guide-

lines set forth in the one paper that we have referred to

prepared by Mr. Longhorn.

Q. You are referring to the paper which I believe is

Exhibit 12-B in this proceeding?

A. I don’t know the number.

Q. I show you what has been admitted into evidence as

Exhibit 12-B and ask you if that’s the paper you are

referring to?

A. It is. In addition to that, of course, we were in-

structed to follow the—any procedures or guidelines given

in the training manual. We are always instructed to look

eRe

«

A. 101

into the activities both within Wisconsin and without Wis-

consin to see how Wisconsin fits into the overall picture

in order to test the various unitary concepts that are in-

volved.

Q. How thoroughly did you follow that outline con-

tained in Mr. Longhorn’s paper?

A. As thoroughly as it was possible.

Q. I see. And that would all be laid out in your work

papers?

A. I think we covered that in the pretrial hearings that

most of it is, some of it is not. I found that it was very

difficult to obtain information about exactly how the opera-

tions in Wisconsin were conducted. 1 asked for that in-

formation repeatedly. Unfortunately, I didn’t record those

requests in the work papers, as you know.

During my first visit at Humble we had quite a long talk

with the state tax manager of Humble. At that time I

told him that I would be auditing the returns of Humble

first to determine if the return filed was correct. And to

do that I would have to look into the unitary nature of

business and that I would need a great deal of information

in that area. Mr. Heidner was the manager of the State

Tax Department and he said he would get me what he

could.

Q. Isn’t it a fact that your working papers really do not

reflect whether or not you asked him many of the ques-

tions contained in the outline procedures of the Longhorn

paper?

A. That’s correct.

Q. Now you mentioned that your first job was to de-

termine whether the returns as filed were correct. Did

you make a specific examination of the tax returns on the

separate accounting basis on which they were filed?

A. Well, first I attempted to look into the unitary

nature of the business, of course, to determine whether

A. 102

or not it would even be necessary to examine the return as

filed. If it’s unitary the return as filed was meaningless

also as we all know.

Q. Well, you haven’t yet answered my question. Did

you or did you not make a separate accounting and ex-

amination?

A. I made some tests of the returns as filed.

Q. And I believe you testified on discovery that you

audited the reported sales back to the print-outs and you

accepted them as filed?

A. That’s correct.

Q. So they actually reflected the gross revenues from

Wisconsin activities as far as you could determine?

A. So far as I could determine from the print-outs.

Q. And you have no basis to challenge the amount of

sales reported in the State of Wisconsin?

A. That’s correct.

Q. And I believe you also said that you traced back the

cost of sales?

A. I don’t recall if I said that I traced back the cost of

sales.

Q. And you found no basis on which to challenge the

reported cost of sales figures?

A. I did say that and that disturbed me since I said

that.

Q. My question was did you say that on the discovery

proceedings?

A. Is it in the proceedings?

Q. Would you like me to read it back to you?

A. Yes, if you would like to.

Q. This is the transcript of a discovery proceeding

which was taken on the 15th and 16th days of January,

1974. This is admitted as Exhibit 8 in this proceeding, the

transcript having been made part of this record.

iat at na AM a ne SS ee

A. 103

I refer you to Page 29 of this discovery trans

This text is long and has been trimmed here. Open the source document for the complete record.