Motion to Dismiss or Affirm — Exxon Corp. v. South Carolina Tax Commission

Berta

EILED

IN THE |) DEC 6 tary

Supreme Court of the UnitedStgeays...curnn

Octoper TERM, 1979

79-8434

EXXON CORPORATION, Appetiant,

versus

SOUTH CAROLINA TAX COMMISSION, Appe.Ler

On APPEAL FROM THE SUPREME CouRT OF SouTH CAROLINA

MOTION TO DISMISS AND/OR AFFIRM

DANIEL R. MecLEOD,

Attorney General of South Carolina.

JOE L. ALLEN, JR.,

Deputy Attorney General.

G. LEWIS ARGOE, JR.,

Senior Assistant Attorney General.

JACKSON E. FIELDS, JR.,

Assistant Attorney General,

Post Office Box 125,

Columbia, South Carolina 29214,

Attorneys for Appellee.

The R. L. Bryan Company, Lega! Printers, Columbia, S. C.

INDEX

MOTION TO DISMISS AND/OR AFFIRM

PaGE

I oh, Or eae ek eth, Where ped bas aee 2.

I. Motion to Dismiss

Lack of a Substantial Federal Question

PUI ot eae Sula cians GENES RU o Un teusews 6

MI 5 oa 5 Be as es eee eth oOr> GE ROS splay te BES 6

II. Motion to Affirm

Decision of the South Carolina Supreme Court

Amply Supported by the Record and Decisions

of This Honorable Court

SE eos ea eo en tai et ae ie tae wom, te. page 10

(i)

CASES CITED

PaGE

Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission,

y is a a rene meer

Johns-Manville Products Corp. v. Commissioner of

Revenue Administration, 115 N. H. 428, 343 A. 2d 221;

Appeal Dismissed, 423 U. 8S. 1069, 47 L. Ed. 2d 79, 96

PE SOOO: Rowe or ar ob ae a ee a ec

Moorman Manufacturing Co. v. Bair, 98 S. Ct. 2340 . .4,

Northwestern States Portland Cement Co. v. State of

Minnesota, 358 U. S. 464, 795 S. Ct. 357 ..... 0.1... 5,

Underwood Typewriter Co. v. Chamberlain, 254 U. S.

Ran, ©. Uae Oey Cos We. BO 3k ci...

United States Steel Corp. v. Multistate Tax Commis-

SO a GI PIE se cy re eee ns Pewee

( ii )

3 IN THE

Supreme Court of the United States

OcrosER TERM, 1979

EXXON CORPORATION, AppPetiant,

versus

SOUTH CAROLINA TAX COMMISSION, Appe.er

On APPEAL FROM THE SUPREME CourRT oF SoutTH CAROLINA

MOTION TO DISMISS AND/OR AFFIRM

The Appellee, pursuant to Rule 16 of the Rules of this

Honorable Court, respectfully moves that the appeal here-

in made from the Order of the Supreme Court of the State

of South Carolina be dismissed because the said appeal

does not present a substantial federal question, or in the

alternative, that the Order be affirmed because the dispo-

sition of the issue is settled by existing decisions of this

Honorable Court, or because the decision of the Supreme

Court of South Carolina is fully supported by the record.

2 EXXON CorP., APPELLANT, v. S. C. Tax ieiceetieiien APPELLEE

I

ARGUMENT

MOTION TO DISMISS

No substantial Federal question is presented.

The Court is asked to take jurisdiction of this case

upon the grounds that South Carolina Code §$§ 12-7-250 and

12-7-1130 are repugnant to the Constitution of the United

States. Three questions are presented alleging the two sec-

tions to be unconstitutional because the same contravene

the Due Process Clause of the Fourteenth Amendment and

the Commerce Clause of the United States Constitution.

Neither the Jurisdictional Statement nor the ques-

tions, however, place in issue the concurrent factual find-

ings of the Supreme Court of South Carolina and the Court

of Common Pleas of Richland County. The facts thus

found by the South Carolina Courts and not here contested

should be binding. Both South Carolina courts found that

the Appellant during the years involved conducted a uni-

tary business and that its apportioned income from the uni-

tary business was subject to taxation by the State. This

was the substantive holding of those courts and, as stated,

such is not placed in issue by the Jurisdictional Statement

or the three questions.

If error was committed by the courts, which is as-

suredly denied, the same would be that of finding from the

facts presented that the Appellant conducted a unitary

business with the Exploration and Production of erude oil

related thereto.

By reason of the Jurisdictional Statement and ques-

tions, the only issue thus before this Court is whether the

South Carolina statute that imposes an income tax on a

unitary business conducted within and without the State

upon an income base that represents the proportion of the

et ee a

EXXON CorRP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE 3

trade or business carried on within the State conflicts with

the requirements of due process or burdens interstate com-

merce. Obviously, the sections do not. The tax is appor-

tioned by use of the three factor formula. The Appellant

acknowledges that the formula reasonably apportions the

income.

In its argument that substantial federal questions are

presented, the Appellant states that it does not raise the

question of the right of the State to tax income from a mul-

tistate business or the applicability of the apportionment

formula. The appellant more importantly admits that it

does not question the “(3) validity of the three factor for-

mula of South Carolina when properly applied.” (See page

13 of the Jurisdictional Statement.) Whether it has been

properly applied must of necessity be determined upon the

findings of facts but these findings of facts are not in issue.

Here, neither the statement nor the questions dispute the

fact that the Appellant conducts a unitary business. The

fact that a segment of this unitary business is conducted

without the State does not preclude the inclusion of the in-

come attributed to that activity in apportionable income.

The Appellant thus prosecutes this appeal for this

Court to review and reconsider the facts and find from the

evidence presented that income attributable to its Explora-

tion and Production of crude oil is unrelated and a separate

business activity from its refining and marketing of pe-

troleum products. It has failed, however, to raise this issue.

Added support for the above is evidenced by the “sub-

stantial concepts” asserted in the statement. The Appellant

first contends that a corporate entity cannot be found to be

unitary based only upon an examination of the corpora-

tion’s management structure and the nondelineation pub-

licly of its separate operational functions; the second con-

tention is that of whether situs income can also be included

4 EXxON CorP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE

in apportioned income and, finally, it is contended that mul-

tiple taxation as a burden on commerce depends on the fact,

rather than the power of a situs state to tax.

The first contention is without factual support. Clearly,

the decisions of the South Carolina courts were not based

or predicated upon such a limited factual consideration.

The record is substantial ana clearly reflects a full con-

sideration of all of the Appellant’s business activities.

There were thirty-eight pages of admission, six depositions

with 350 pages of testimony, a transcript of 689 pages and

the exhibits considered by the Court (Appendix B, App.

24 of the statement). These facts standing alone negate the

Appellant’s assertions that only the corporate structure

was considered. The facts set forth in both Orders estab-

lish beyond doubt that the courts’ holdings were predicated

on all the evidence, including the relationship of the various

so-called functional operations.

With reference to the other two contentions, it appears

well settled that South Carolina is not precluded from tax-

ing income from business activities just because some other

state may be taxing the business activity within that state.

It has long been seviled that the states are free to employ

the unitary business standard. Underwood Typewriter Co.

v. Chamberlain, 254 U.S. 113, 41 S. Ct. 45, 65 L. Ed. 165;

United States Steel Corp. v. Mu‘tistate Tax Commission,

98 S. Ct. 799.

The rule is that the Appellant must factually prove

that the South Carolina statutes discriminately subject its

income to taxation. This Court again recognized in Moor-

man Mfg. Co. v. Bair, 98 S. Ct. 2340, that no uniform system

for apportioning income exists: that such possibly results

in multiple taxation, however, the same was insufficient to

invalidate the state law. Here the Appellant has-shown no

<-> _—»,-

EXXON CorP., APPELLANT, v. S. C. TAX CoMMISSION, APPELLEE 5

evidence that more than 100% of its income is taxed by the

taxing authorities in which it does business.

In the case of Johns-Manville Products Corp. v. Com-

missioner of Revenue Administration, 115 N. H. 428, 343

A. 2d 221, the court was confronted with a similar question.

In that case the income from the sale of timberland in Mis-

sissippi was subject to taxation by Mississippi and the gain

was also included in apportionable income in New Hamp-

shire. It was argued that this was unlawful because of mul-

tiple taxation. The Supreme Court of New Hampshire held

that:

“Plaintiff argues further that since Mississippi has

taxed the entire gain, the decision of the board will

result in multiple taxation. Even if this were a valid

objection (Illinois Cent. R. Co. v. Minnesota, 309 U.S.

157 (1940); State Tax Comm’n. v. Aldrich, 316 U. S.

174 (1942); Northwestern States Portland Cement Co.

v. Minnesota, 358 U. S. 450 (1959); General Motors

Coro. v. Washington, 377 U. S. 485 (1964), plaintiff’s

complaint should not be directed against New Hamp-

shire whose tax is fairly apportioned and constitution-

ally proper.”

An appeal of that decision to this Honorable Court was dis-

missed for “want of a substantial federal question”. 423

U.S. 1069, 47 L. Ed. 2d 79, 96S. Ct. 851.

No difference exists between that case and the present

case. The fact that some other state may have taxed the

income that the Appellant allocates to its Exploration and

Production activity is no bar to South Carolina including

that income in its apportionment formula. The South Car-

olina tax is apportioned by a formula that the Appellant

admits to be reasonable and is not in issue. The record

clearly establishes that no substantial federal question is

in issue.

6 EXXON CorP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE

CONCLUSION

No substantial federal question exists in this action. It

is not unlawful to properly apportion the income of a uni-

tary business and to include therein that income that is at-

tributable to the out-of-state activity. The Appellant’s

effort to convert the factual findings into a declaration of

the unconstitutionality of the South Carolina statutes must

fail. We respectfully submit that the appeal should be

dismissed.

II

ARGUMENT

MOTION TO AFFIRM

The decision of the South Carolina Supreme Court

should be affirmed in that the same is abundantly supported

by the record and is in conformity with the decisions of this

Honorable Court.

The Appellant admittedly is engaged in the business

of marketing petroleum products. Its activities consist of

finding and producing crude oil, the refining of such crude

and the sale of the petroleum products to its customers. It

is this last transaction from which the income was earned.

This Court in the case of Bass, Ratcliff & Gretton, Ltd, v.

State Tax Commission, 266 U. S. 271, 45 S. Ct. 82, was con-

fronted with the taxation of a manufacturer of ale. The ale

was brewed in England and imported and sold through

branch offices located in New York City and Chicago. The

question was whether the inclusion of the income from the

activity in England burdened foreign commerce. The Court

held: »

‘*So in the present case we are of opinion that as the

Company carried on the unitary business of manufac-

turing and selling ale, in which its profits were earned

by a series of transactions beginning with the manu-

a Ode wi eee

Exxon CorP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE 7

facture in England and ending in sales in New York

and other places—the process of manufacturing result-

ing in no profits until it ends in sales—the State was

justified in attributing to New York a just proportion

of profits earned by the Company from such unitary

business.” (Emphasis added.)

The Appellant states that its Exploration and Produc-

tion is separate and unrelated to its refining and marketing

activity. Such contention was discarded, however, by the

South Carolina courts. We submit that the record sustains

the holdings of the South Carolina Courts and that the Ap-

pellant’s contention is without factual support. Much is

said about accounting, however, we would ask the question

of when did accounting and form take precedent over sub-

stance in tax matters. Substance, not form, has long con-

trolled the disposition of tax questions.

For a support of the above, the Court’s attention

is called to the factual findings set forth in the Order of the

Court of Common Pleas of Richland County (Appendix B)

and the Order of the Supreme Court of South Carolina

(Appendix A). The Appellant allocated the majority of its

income to Exploration and Production, about 90%, with

4% and 7% allocated to refining and marketing (Appendix

B, App. 29 of the statement).

At this point it should be noted that the Appellant’s

production of crude was transferred to its supply depart-

ment and then refined or sold to others. Significance must

also be given to the fact that the Appellant refined approxi-

mately 1,000,000 barrels of crude per day and produced

about 800,000 barrels of that amount (Appendix B, App.

20 of the statement).

Also of importance is the fact that the income attrib-

utable to all of the functions entered into one company trea-

sury. The alleged income from Exploration and Production

was used by the company to buiid refineries, to make other

8 EXXON CorP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE

investments and to pay ordinary corporate expenses, such

as salaries.

These facts clearly sustain the factual holding of the ©

South Carolina courts that the Appellant conducted a uni-

tary business.

It should also be nc“ed that the Appellant alleges that

it produces its crude, selis the same to its supply depart-

ment, that then sells to its refining department, that then

sells to its marketing department. How is it possible for the

Appellant to sell itself something it already owns or how

can it transfer something to itself that is in its possession?

Strong reliance is made upon posted field prices, however,

these are prices that the Appellant sets. In other words, it

says we will pay ourselves so much for the crude. Admit-

tedly, some crude is sold to others, however, this is a matter

of convenience and where is the evidence to establish such

sales in comparison to total production. Additionally, the

availability of crude was dependent upon production (Ap-

pendix B, App. 28).

Before concluding argument on this motion, attention

is called to the settled law of this Honorable Court that sus-

tains the right of the states to tax the income of the Appel-

lant’s unitary business. Moorman Mfg. Co. v. Bair, 98 S. Ct.

2340, is the latest consideration of the issue.

The tax is not an unapportioned tax that by its nature

subjects interstate commerce to an unfair burden. In the

case of N. W. States Portland Cement Co. v. State of Minn.,

358 U.S. 464, 795 S. Ct. 357, the court held:

“This is not an unapportioned tax which by its very

nature makes interstate commerce bear more than its

fair share. As was said in Central Greyhound Lines of

New York v. Mealey, 1948, 334 U. S. 653, 661, 68 S. Ct.

1260, 1265, 92 L. Ed. 1633, ‘it is interstate commerce

which the State is seeking to reach and.* * * the real

question [is] whether what the State is exacting is a

EXXON CorP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE 9

constitutionally fair demand by the State for that as-

pect of the interstate commerce to which the State

bears a special relation.’ The apportioned tax is de-

signed to meet this very requirement and ‘to prevent

the levying of such taxes as will discriminate against

or prohibit the interstate activities or will place the

interstate commerce at a disadvantage relative to local

commerce.’ Id., 334 U. S. at page 670, 68 S. Ct. at page

1270. Logically it is impossible, when the tax is fairly

apportioned, to have the same income tax twice. In

practical operation, however, apportionment formulas

being what they are, the possibility of the contrary is

not foreclosed, especially by levies in domiciliary

States. But that question is not before us. It was

argued in Northwest Airlines v. State of Minnesota,

1944, 322 U. S. 292, 64 S. Ct. 950, 952, 88 L. Ed. 1283,

that the taxation of the entire fleet of its airplanes in

that State would result in multiple taxation since other

States levied taxes on some proportion of the full value

thereof. The Court rejected this contention as being

‘not now before us’ even though other States actually

collected property taxes for the same year from North-

west upon ‘some proportion’ of the full value of its

fleet. Here the records are all to the contrary. There is

nothing to show that multiple taxation is present. We

cannot deal in abstractions. In this type of case the tax-

payers must show that the formula places a burden

upon interstate commerce in a constitutional sense.

This they have failed to do.”

The Appellant has failed to establish an unfair burden.

The South Carolina Supreme Court in its Order stated:

“Turning to the question of multiple taxation and the

Commerce Clause, the prevention of double taxation

is, of course, the whole reason for apportioning income.

During the years in question, the South Carolina three

factor formula allocated 1.0%, 1.1% and 1.2% of Hum-

ble’s overall income to this State. The record does not

disclose what portion of Humble’s income was taxed

by all states combined. If, in fact, Humble paid income

10 Exxon CorP., APPELLANT, v. S. C. TAX COMMISSION, APPELLEE

taxes on more than one hundre@ (100%) percent of its

income to all states combined, it has not attempted to

prove that fact. See Covington Fabrics, supra. Hum-

ble has, however, introduced into evidence foreign laws

from a number of states which levy extractions known

generally as severance taxes. These taxes are not in-

come taxes, they are privilege taxes. For example, the

Texas severance tax is described as an ‘occupation tax

on oil produced measured by number of barrels of oil

taken’. See State v. Humphrey, 159 S. W. 2d 162 (1942).

It has been settled law for many years that it is not

multiple taxation to levy taxes on different incidents,

for example, a single taxpayer may pay property

taxes, privilege taxes and income taxes and not be sub-

ject to multiple taxation. Humble has shown no multi-

ple burden.” (Appendix A, p. 14.)

The above negate the Appellant’s assertion of the un-

constitutionality of the South Carolina statutes.

CONCLUSION

The evidence conclusively establishes the correctness

of the decision of the South Carolina Supreme Court. It is

supported by fact and judicial declaration of this Honor-

able Court and the Order should be affirmed.

Respectfully submitted,

DANIEL R. MeLEOD,

Attorney General of South Carolina.

JOE L. ALLEN, JR.,

Deputy Attorney General.

G. LEWIS ARGOEK, JR.,

Senior Assistant Attorney General.

JACKSON E. FIELDS, JR.,

Assistant Attorney General,

Post Office Box 125,

Columbia, South Carolina 29214,

Attorneys for Appellee.