Appendix — ASARCO Inc. v. Idaho State Tax Commission

INDEX TO APPENDICES

PAGE

APPENDIX A:

Second Opinion of the Supreme Court of Idaho

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Order of the Supreme Court of the United States... 3a

First Opinion of the Supreme Court of Idaho

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Memorandum of the State District Court.......... 36a

Findings and Conclusions of the State District Court 38a

Decision of the Idaho State Tax Commission ...... 46a

APPENDIX B:

First Remittitur of the Supreme Court of Idaho

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Second Remittitur of the Supreme Court of Idaho

CE PI OU, NOOR ooo vin n ec candecesccuessves 64a

APPENDIX C:

Notice of Appeal Filed in the Supreme Court of

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Notice of Appeal Filed in the State District Court

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APPENDIX D:

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APPENDIX E:

Schedules of Dividend, Interest and Capital Gain Income

Extracted from Paragraph 11 of Stipulation Filed in

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APPENDIX F:

Appendix F to Jurisdictional Statement in Mobil Oil

Corp. v. Commissioner of Taxes of Vermont, 445

U.S. 425, 100 S.Ct. 1223 (19BO) 0... cece ccc eee 78a

la

APPENDIX A

1981 Opinion No. 15

IN THLE SUPREME COURT OF THE STATE OF IDAHO

No. 12198

Boise term, January i981

Filed: March 4, 1981

R.H. Young, Clerk

AMERICAN SMELTING & REFINING Co., Plaintiff-respondent,

Vv.

IDAHO STATE TAX Commission, Defendant-appellant.

On remand from the United States Supreme Court.

Prior opinion and order of this Court are reinstated.

David Leroy, Attorney General, Theodore V. Spangler,

Jr., Deputy Attorney General; for State Tax Commis-

sion, Boise, Idaho, for appellant.

Philip E. Peterson, Lewiston, Idaho, and George Beatty,

of Lec, Toomey & Kent, Washington, D.C., for respon-

dent American Smelting & Refining Co.

William D. Dexter, Olympia, Washington, for amicus

curiae Multistate Tax Commission.

Tyrone Fahner, Attorney General of Illinois, Chicago, Il-

linois, for amicus curiae State of Illinois.

Per CURIAM:

The order of this Court in American Smelting & Refining

Co. v. Idaho State Tax Commission, 99 \daho 924, 592 P.2d

39 (1979), was vacated by the United States Supreme Court in

ASARCO, Inc. v. Idaho State Tax Commission, 445 U.S.

__., 100 §.Ct. 1333 (1980), and remanded for further con-

sideration in light of the decision of the United States

Supreme Court in Mobil Oil Corp. v. Comm’r of Taxes of

Vermont, 445 U.S. —.-__, 100 S.Ct. 1223 (1980). The case

having been rebriefed and reargued, it is the conclusion of

this Court that our prior opinion and order are consistent

with both Mobil Oil and the more recent decision in Exxon

2a

Corp. v. Wisconsin Dept. of Revenue, 445 U.S. _____, 100

S.Ct. 2109 (1980). The opinion and order in American

Smelting & Refining Co. v. Idaho State Tax Commission, 99

Idaho 924, 592 P.2d 39 (1979), are hereby reinstated.

3a

MARCH 24, 1980

Vacated and Remanded on Appeal

No. 78-1839. ASARCO INc. (FORMERLY AMERICAN

SMELTING & REFINING Co.) v. IDAHO STATE TAX COMMw’SION,

Appeal from Sup. Ct. Idaho. Judgment vacated and case

remanded for further consideration in light of Mobil Oil

Corp. v. Commissioner of Taxes of Vermont, ante, p. 425.

Reported below: 99 Idaho 924, 592 P. 2d 39,

4a

In THe Supreme Court or THe Strate or [pano

No. 12198

Boise term, December 1977

Filed: March 12, 1979

American Smettine & Rerinina Co., Plaintiff-respondent,

v.

Ipano State Tax Commission, Defendant-appellant.

Appeal from the District Court of the Fourth Judicial

District of the State of Idaho, Ada County. Hon. Marion

J. Callister, District Judge.

Appeal from apportionment of income for Idaho state

income tax purposes. Reversed and remanded.

David Leroy, Attorney General; Theodore V. Spang-

ler, Jr., Deputy Attorney General for State Tax Com-

mission, Boise, Idaho, for appellant.

Philip KE. Peterson, Lewiston, Idaho; R. Michael South-

combe, of Clemons, Cosho & Humphrey, Boise, Idaho;

and George Beatty, of Lee, Toomey & Kent, Washing-

ton, D.C., for respondent.

William D. Dexter, Olympia, Washington, for amicus

curiae Multistate Tax Commission.

Dale G. Higer, of Eberle, Berlin, Kading, Turnbow &

Gillespie, Boise, Idaho, for amicus curiae United States

Steel Corporation.

Bakes, .J.

This appeal involves state income tax deficiencies as-

sessed against the plaintiff respondent American Smelting

Sa

and Refining Company (ASARCO) by the defendant ap-

pellant Idaho State Tax Commission (Commission). The

principal issues concern the apportionment of ASARCO’s

income from tangible and intangible property as ‘‘ business

income’’ under the Idaho version of the Uniform Division

of Income for Tax Purposes Act (UDITPA).

I

THE FACTUAL BACKGROUND

In 1965 Idaho adopted with slight modification the Uni-

form Division of Income for Tax Purposes Act (UDITPA).

L.C. § 63-3027. The Act contains rules for determining the

portion of a corporation’s total income from a multistate

business which is attributable to this state and therefore

subject to Idaho’s income tax. In general, UDITPA divides

a multistate corporation’s income into two groups: business

income and non-business income. Business income is ap-

portioned according to a three factor formula, LC. 4 63-

3027(i), while non-business income is allocated to a specific

jurisdiction. I.C. § 63-3027(d)-(h). Idaho modified UDITPA

to provide that ‘‘a parent and subsidiary corporation may,

when necessary to accurately reflect income, be considered

a single corporation.’’ I.C. § 63-3027(s).

ASARCO is a multistate-multinational corporation pri-

marily engaged in mining, smelting and refining nonferrous

metals. ASARCO owns stock in several domestic and for-

eign corporations, most of which are engaged in similar

or related operations. ASARCO’s commercial domicile is

in New York. Its Idaho activities include the operation of

two mines, the Page Lead Zine Mine and the Galena Silver

Mine, and the location of its northwest mining department

headquarters in Wallace, Idaho. ASARCO also sells in

Idaho small amounts of secondary metals—metals re-

claimed from scrap metal.

6a

In 1971 the Multistate Tax Commission (MTC) com-

pleted a joint audit of ASARCO on behalf of Idaho and

five other states. The MTC is the administrative agency

of the Multistate Tax Compact, of which Idaho is a mem-

ber. 1.C. § 63-3701. Article VIII of the compact authorizes

the MTC to perform interstate audits on behalf of member

states. Idaho statutes specifically authorize the Idaho State

Tax Commission to participate in such joint audits. I.C.

§ 63-3707. The constitutionality of the Multistate Tax Com-

pact, including its joint audit provisions, has been upheld.

United States Steel Corp. v. Multistate Tax Comm'n, ——

U.S. ——, 8% S.Ct. 799 (1978); Kinnear v. Hertz Corp.,

545 P.2d 1186 (Wash. 1976).

The MTC auditor made several significant adjustments

in the computation of ASARCO’s Idaho tax returns for

the years of 1968, 1969 and 1970. These adjustments, which

were accepted by the Idaho State Tax Commission, resulted

in the tax deficiencies at issue in this case. These adjust-

ments may be summarized as follows.

The MTC auditor combined or ‘‘unitized’’ with ASAR-

CO, pursuant to I.C. §63-3027(s), six corporations—all

wholly owned subsidiaries of ASARCO.' Because these

corporations were unitized with ASARCO, their incomes

were combined with ASARCO’s for Idaho tax purposes.

However, dividends paid by the six corporations to ASAR-

CO were not considered as income to ASARCO but were

viewed by the auditor as intracompany transfers.

The MTC auditor also made significant changes in the

computation of ASARCO’s ‘‘business income,’’ which was

subject to apportionment. I.C. § 63-3027(i). These changes

are best summarized in terms of the type of income in-

volved.

* The ‘‘unitized’’ corporations were: Federal Metals of Canada;

ASARCO Mercantile Co.; Enthone, Ine.; International Metal Co.;

Lone Star Lead Construction Co.; and Northern Peru Mining Co.

7a

Dividend Income: From a monetary standpoint, this is

the most significant of the disputed items of income. The

MTC auditor included as business income dividends paid

ASARCO by various corporations, other than the six ‘‘uni-

tized’’ corporations. The dividends from these ‘‘non-uni-

tized’’ corporations totaled $48,310,126.00 in 1968, $66,374,-

428.00 in 1969, and $61,772,970.00 in 1970. This dividend

income represented a substantial portion of ASARCO’s

total income for the tax years in question. Summarized

below are the activities of the principal corporations which

paid ASARCO these dividends and their relationship to

ASARCO.

1. Southern Peru Copper Corporation: This corporation

produces blister copper, a material which is 99% copper

and also contains byproduct material such as gold, silver

and florium. ASARCO owns 51.5% of the stock and the

remainder is owned by three other mining companies. Pur-

suant to a management agreement, ASARCO is entitled

to elect a plurality but not a majority of the directors.

Southern Peru has its own staff, but ASARCO provides

certain technical assistance such as purchasing, traffic and

tax preparation services. ASARCO receives a negotiated

fee for these services.

Approximately 30% of Southern Peru’s blister copper

is sold to Kuropean customers through Southern Peru

Copper Sales Corporation. The stock ownership in this

sales corporation is the same as in Southern Peru. How-

ever, it is staffed entirely by ASARCO employees. The

European sales are made through the sales corporation in

order to preserve Southern Peru’s favored federal tax

status as a Western Hemisphere Trading Corporation.

The remainder of Southern Peru’s blister copper is di-

vided among the four stockholders according to their own-

ership, e.g., ASARCO receives 51.5% of the remainder.

The price for the copper is determined by reference to a

quotation in a trade publication, and during the years in

8a

question ASARCO’s purchases from Southern Peru were

substantial. This output contract with Southern Peru is

important to ASARCO but is not essential to its smelting

business.

2. M.I.M. Holdings, Ltd.: This is a major corporation

engaged in the mining, milling, smelting and refining of

copper, lead, zine and silver in Australia and which also

operates a lead and zinc refinery in England. Hence, it is

involved in virtually the same business as ASARCO.

ASARCO owns 52.7% of the stock, and the rest is widely

held. However, ASARCO has no directors or officers in

M.L.M. At trial an ASARCO executive explained its failure

to elect any directors as follows:

‘‘This company has been very successful in staffing

the corporation with Australian people and [they have]

been able to run this company by themselves and,

therefore, in consequence of the nationalistic feeling

which develops in most of such developing countries

we have not exercised any right we might have to

elect a director to the board of the company.’’

M.1.M. uses an ASARCO furnace patent, for which it pays

a royalty, and occasionally ASARCO provides it some

technical services. It is not economically feasible to ship

ore or concentrates from Australia to the United States

for smelting and there is only an insignificant amount of

sales between these two corporations. In general, M.I.M.

operates independently of ASARCO.

3. General Cable and Revere Copper: These two copper

fabricators are major customers of ASARCO and ASAR-

CO owned approximately 34% of the stock in each cor-

poration. The remaining stock was widely held. Revere

Copper also uses an ASARCO patent, for which it pays

royalties, and both companies utilize ASARCO’s stock

transfer department, for which they pay a fee. In 1961 the

United States Department of Justice filed an antitrust

9a

action against ASARCO because of its interest in General

Cable and Revere Copper. The action resulted in censent

decrees signed in 1967 which prohibited ASARCO from

maintaining common officers in these companies, voting its

stock, selling these companies copper at prices lower than

those quoted their competitors, and acquiring stock in any

other copper fabricator. In 1970 ASARCO was compelled

to divest itself of its stock in General Cable. Following

the divestiture, General Cable continued to be a major

customer of ASARCO.

4, Lake Asbestos of Quebec, Ltd.: This company mines

and processes asbestos fibers in Canada. Its products are

sold throughout the world, and in order to preserve its

status as a Western Hemisphere Trading Corporation its

sales are made through a conduit corporation, ASARCO

International Corporation. Both Lake Asbestos and ASAR-

CO Intl. are wholly owned by ASARCO. Lake Asbestos has

its own staff, but ASARCO provides important manage-

ment services. Lake Asbestos seeks ASARCO’s direction

and approval on major policy decisions. ASARCO Intl. is

staffed entirely by ASARCO and Lake Asbestos employees.

The business activities and operations of Lake Asbestos

and ASARCO Intl. are in a field unrelated to ASARCO’s

mining and smelting operations and involve different tech-

nology. ASARCO shared no facilities, customers or sales

force with these companies and it did not purchase any

of their products.

5. ASARCO Mexicana, 8.A.: This company mines and

smelts lead and copper in Mexico, ASARCO owns 49%

of the stock and the remainder is publicly held by Mexican

nationals. At one time ASARCO owned 100% of the com-

pany, but in 1965 was required by Mexican law to divest

itself of 51% of the stock. ASARCO Mexicana does not

seek approval from ASARCO concerning major policy

decisions, but ASARCO does provide technical services,

makes some direct purchases from ASARCO Mexicana, and

10a

acts as its agent for sales outside Mexico. ASARCO Mexi-

cana pays ASARCO for those services.

6. Compania American Smelting, S.A.: This is a small

company which purchases ore in Chile for ASARCO smelt-

ers. It is wholly owned by ASARCO and paid ASARCO

small dividends in 1968 and 1969.

7. Heela Mining Co., Kennecott Copper Co., Phelps-

Dodge and United Park City Mines: These are four mining

companies in which ASARCO owns a very small percentage

of the stock. ASARCO exercises no control over these cor-

porations and they made only minimal sales to ASARCO.

Interest Income: ASARCO received interest income from

a variety of sources, including customers’ notes and bonds,

notes taken in connection with the sale of an Illinois plant

and the sale of General Cable stock, and time certificates,

bankers’ acceptances and commercial paper notes. In its

brief ASARCO indicates that it originally reported only

its interest income from trade accounts receivable as busi-

ness income. The MTC auditor, however, classified all of

the foregoing interest income as business income.

Rents: ASARCO’s rental income, which the auditor con-

sidered business income, was for the most part derived

from homesites rented to employees working near ASAR-

CO mines and plants.

Royalties: ASARCO earned royalties from leases to third

parties of a portion of its mineral land, and from licenses

to third parties of patents developed by ASARCO and

used in ASARCO’s business. The MTC auditor considered

these royalties as business income.

Capital gains and losses: ASARCO realized gains on the

disposition of three categories of assets: fixed assets, notes

and bonds, and securities. The fixed assets were used in

ASARCO’s everyday business activities. The notes and

bonds consisted of United States Treasury notes and bonds

lla

and state and municipal notes and bonds. They were pri-

marily acquired with idle cash in order to earn a return

while the funds were not needed in ASARCO’s business

operations and they were generally held less than a year.

The securities were in ASARCO subsidiaries and General

Cable. The gains and losses realized from the disposition

of these assets were all considered as business income by

the MT'C auditor.

The MTC auditor also made an alteration in the compu-

tation of the three factor formula used to apportion ASAR-

CO’s business income. UDITPA provides for the compa-

tation of a ratio of the taxpayer’s property, payroll and

sales in Idaho to its property, payroll and sales every-

where. This ratio, the Idaho apportionment factor, is

applied to the taxpayer’s total business income and the

result is the portion of the taxpayer’s business income

attributable to Idaho and subject to its income tax. I.C.

§ 63-3027 (i)-(q). In computing the denominator—the every-

where portion—of the sales factor, ASARCO included the

value of some ore transferred from its mines in Idaho to

its smelter in Montana. However, ASARCO did not include

those transfers in the numerator of the sales factor in

either Idaho or Montana, which is also a member of the

multistate compact and participated in the joint audit. The

MTC auditor included those transfers in the numerator of

the Idaho sales factor but not in the numerator of the

Montana sales factor.

As a result of all the adjustments by the MTC auditor,

which were adopted by the commission, the commission

assessed against ASARCO Idaho income tax deficiencies

of $92,471.88 for 1968, $111,292.44 for 1969, and $121,750.76

for 1970, plus interest. ASARCO sought review of the

deficiencies in the district court pursuant to I.C. § 63-3049.

Following a court trial, the district court upheld the com-

bination of ASARCO with six of its subsidiaries for tax

reporting purposes, but the court determined that the

12a

commission had erred in including the dividends, interest,

royalties, rents and capital gains as business income, The

district court did not modify the numerator of the sales

factor to include the intracompany ore transfers as re-

quested by the commission. The commission has appealed

from the district court’s ruling concerning the classification

of income and from the court’s refusal to modify the sales

factor. ASARCO has not cross appealed from the district

court ruling that the six subsidiaries were properly com-

bined with ASARCO. This appeal therefore raises two

sets of issues: (1) the classification of the disputed income,

and (2) the modification in the sales factor. We address

them in that order.

Il

CLASSIFICATION OF INCOME

ASARCO challenged the commission’s apportionment of

its income from dividends, interest, rentals, capital gains

and royalties as being inconsistent with a proper inter-

pretation of the definition of business income found in L.C.

§ 63-3027(a)(1) and as being in violation of the due process

and commerce clauses of the United States Constitution.

We consider first the issue of statutory construction and

second the constitutional issues.

A

Interpretation of Statutory Provisions

Business income is defined as:

**63-3027. COMPUTING TAXABLE INCOME OF

CORPORATIONS.— ....

“ (a) As used in this section, unless the context other-

wise requires:

**(1) ‘Business income’ means income arising from

transactions and activity in the regular course of the

l3a

taxpayers’ trade or business and includes income from

the acquisition, management, or disposition of tangible

and intangible property when such acquisition, man-

agement, or disposition constitute integral or necessary

parts of the taxpayers’ trade or business operations.

Gains or losses and dividend and interest income from

stock and securities of any foreign or domestic cor-

poration shall be presumed to be income from intan-

gible property, the acquisition, management or dis-

position of which constitute an integral part of the

taxpayers’ trade or business; such presumption may

only be overcome by clear and convincing evidence to

the contrary. . . .’’? (Emphasis indicates provisions

not part of the uniform act but added by the Idaho

legislature. )*

A few general comments concerning this definition of busi-

ness income are necessary in order to put the issues raised

in this appeal in the proper perspective.

First, the income referred to in subsection (a)(1) is

income arising from the taxpayer’s trade or business which

is conducted, in part at least, in this state. Some corpora-

tions, particularly large conglomerates, may be engaged in

several separate and distinet trades or businesses. The

state may include as business income only the taxpayer’s

income arising from a trade or business conducted in this

state and is not entitled to apportion income arising from

a trade or business having no connection with this state.

*In 1969 the legislature amended I.C. § 63-3027(a)(1) by de-

leting a phrase which limited the application of the presumption

stated in the second sentence of the subsection to corporations ‘‘in

which the taxpayer owns or has a right to acquire, directly or

indirectly, more than five per cent (5%) of the voting stock... .’’

Ch, 319, § 9, 1969 Idaho Sess. Laws 982, 991-92. Neither party has

argued that the prior statute requires a different result in this

ease than the application of the current statute, and the effect of

that amendatory legislation is not an issue in this case.

'4a

However, ‘‘whether a number of business operations hav-

ing common ownership constitute a single or unitary busi-

ness or several separate businesses for tax purposes de-

pends upon whether they are of mutual benefit to one

another and on whether each operation is dependent on or

contributory to others.’”? Great Lakes Pipe Line Co. v.

Commissioner of Taxation, 138 N.W.2d 612, 616 (Minn.

1965), appeal dismissed 384 U.S. 718 (1966). See Sperry &

Hutchinson Co. v. Department of Revenue, 527 P.2d 729

(Ore. 1974); Idaho State Tax Comm. Reg. 27.IV.1.(b).

This qualification, though not directly stated by the sta-

tute’s literal language, is required by the theory under-

lying apportionment statutes, i.e., that the business income

of a unitary business operating in several states cannot

be precisely identified with particular states, see generally,

Butler Bros. v. McColgan, 315 U.S. 501, 62 S.Ct. 701 (1942) ;

Keesling & Warren, The Unitary Concept in the Allocation

of Income, 12 Hastings L.J. 42 (1960), and by the consti-

tutional requirement that there must be some minimal

connection between the interstate business activities gene-

rating the income and the state seeking to tax that income.

See Moorman Mfg. Co. v. Bair, —— U.S. ——, 98 S.Ct.

2340 (1978); Champion International Corp. v. Bureau of

Revenue, 540 P.2d 1300, 1307-08 (N.M.Ct.App. 1975) (Lo-

pez, J., specially concurring).

Second, under I.C. § 63-3027(a)(1) business income in-

cludes not only a corporation’s typical earnings from its

business activities but also income from tangible and in-

tangible property if that property and income has the

requisite connection with the corporation’s trade or busi-

ness. Prior to UDITPA most states did not apportion a

multistate corporation’s income from dividends, interest,

* Subsequent to the years involved in this appeal, the Idaho

State Tax Commission adopted the interpretive regulations promul-

gated in 1973 by the Multistate Tax Commission. The Idaho regu-

lation cited corresponds to MTC regulation IV.1.(b).

1Sa

royalties, rents and gains, but, with some exceptions, the

states allocated that income to a single jurisdiction. See

State Taxation of Interstate Commerce: Hearings Before

the Subcomm. on State Taxation of Interstate Commerce

of the Senate Comm. on Finance, 93rd Cong. Ist Sess. 246,

252-54 (1973) (prepared statement of James H. Peters,

The Distinetion Between Business Income and Non-Busi-

ness Income). Indeed, a preliminary draft of the uniform

act followed this general approach. See First Tent. Draft

of Uniform Allocation and Apportionment of Income Act,

§§ 4.9, reprinted in Brief for Amicus Curiae, United States

Steel Corp., Exhibit A. However, the Act in its final form

and as enacted in this state specifically includes income

from ‘‘the acquisition, management, or disposition of tan-

gible and intangible property when such acquisition, man-

agement, or disposition constitute integral or necessary

parts of the taxpayer’s trade or business operations’’ as

business income. I.C. § 63-3027(a) (1). This break with prior

practice is underscored by the Idaho version of the Act

which contains the specific presumption that income ‘‘from

stock and securities of any foreign or domestic corporation’”’

is business income and which may be overcome only by

‘clear and convincing evidence.’’ I.C. § 63-3027(a)(1). In

short, classifying income as interest, rents, royalties, divi-

dends and capital gains does not determine whether the

income is apportionable under UDITPA. All forms of in-

come are subject to apportionment under UDITPA if the

income falls within the definition of business income.

Third, we do not understand the statutory requirement

that the acquisition, management, or disposition of the

underlying property be an ‘‘integral or necessary’’ part

of the taxpayer's trade or business, I.C. § 63-3027(a)(1),

to mean that the property must be an absolutely indis-

pensable part of the taxpayer’s business, In taxation sta-

tutes the word ‘‘necessary’’ is not generally given such a

restrictive meaning. See, e.g., Welch v. Helvering, 290 U.S.

l6a

111, 54 S.Ct. 8 (1933) (expense deduction); Palo Alto

Town & Country Village, Inc. v. Commissioner, 565 F.2d

1388 (9th Cir. 1977) (expense deduction); Boy’s Club of

Clifton, Inc. v. Township of Jefferson, 371 A.2d 22 (N.J.

1977) (exemption from property tax). Also, the word

‘*necessary’’ was added to the uniform act by the Idaho

legislature at the same time it added the presumption that

income from stock and securities is business income. See

ch. 254, § 1, 1965 Idaho Sess. Laws 639, 642-47. A very

restrictive interpretation of ‘‘integral or necessary’’ would

be inconsistent with the apparent legislative belie? that

income frem securities would generally be business income.

In our view the phrase ‘‘integral or necessary parts of the

taxpayers’ trade or business operations’’ refers to prop-

erty which, though not absolutely essential to the conduct

of the taxpayer's business, contributes to and is identifiable

with the taxpayer’s trade or business operations. Cf. Su-

perior Oil Co. v. Franchise Tax Board, 386 P.2d 33, 38

(Cal. 1963) (defining ‘‘essential’’ as used in test for uni-

tary business).

Althoug: we do not read the phrase ‘‘integral or neces-

sary’’ restrictively, our interpretation of that phrase is not

as broad as that argued by the commission in this case. In

a sense all investments and investment income of a cor-

poration may benefit a corporation’s business operations

in that the investments may supply additional revenue for

operating the trade or business, may improve the corpora-

tion’s standing and financial posture, and in general may

permit the corporation to conduct its regular business ac-

tivities in a way it could not absent those investments. In

this broad sense all corporate investments could be thought

of as property the acquisition, management or disposition

of which constitutes an integral or necessary part of its

trade or business operations. This is the position argued

by the commission. However, such an approach would in-

clude virtually all income as business income and would in

effect emasculate the provisions of UDITPA which provide

17a

for the allocation of income from specified tangible and

intangible property. See 1.C. § 63-3027(d)-(h). Under such

a test it is doubtful whether a corporation could receive

income that would not be classified as business income, Al-

though the legislature clearly intended that the income

from tangible and intangible property be included as busi-

ness income in proper circumstances, it likewise intended

that there would continue to be such a thing as corporate

non-business investment income. Just as we reject the

notion that income from tangible or intangible property

is to be automatically classified as non-business income,

we reject the notion that such income is to be automatically

considered business income simply because the taxpayer’s

business operations may receive some incidental benefits

from those investments.‘ But sce Montana Department of

Revenue v. American Smelting & Refining Co., 567 P.2d

901, 907-08 (Mont. 1977), appeal dismissed —— U.S. ——

(1978).

In our view, in order for such income to be properly

classified as business income there must be a more direct

relationship between the underlying asset and the tax-

payer's trade or business. The incidental benefits from in-

vestments in general, such as enhanced credit standing and

additional revenue, are not, in and of themselves, sufficient

to bring the investment within the class of property the

*The extent to which income from intangibles is to be appor-

tioned as business income has been a source of controversy within

the MTC itself. In 1971 the MTC promulgated interpretive regu-

lations containing a very expansive definition of business income

in this respect. See 32 CCH State Tax Rev. No. 40 at 3-4 (Oct, 5,

1971). Hlowever, in 1973 the MTC promulgated a new set of

regulations which retreated somewhat from the expansive inter-

pretation contained in the 1971 version, See 34 CCITT State Tax

Rev. No. 10 at 2-6 (Mar, 6, 1973); see discussion Boren, Specific

Allocation of Corporate Income in California: Some Problems in

the Uniform Division of Income for Tax Purposes, 30 Tax L.Rev.

607, 681-700 (1975),

18a

acquisition, management or disposition of which constitutes

an integral part of the taxpayer’s business operations.

This view furthers the statutory policy of distinguishing

that income which is truly derived from passive invest-

ments from income incidental to and connected with the

taxpayer's business operations.

Finally, the facts in this case are based substantially

on a lengthy stipulation between the parties, and for the

most part they are not disputed. The decisive issues con-

cern the proper application of the Idaho version of

UDITPA to these facts. Accordingly, the scope of our

review, which is a review of questions of law, is substan-

tially broader than in cases where we are reviewing issues

which turn on the resolution of disputed facts. Montana

Department of Revenue v. American Smelting & Refining

Co., supra. See Wessells v. State, 562 P.2d 1042 (Alaska

1977); Walt Keeler Co. v. Atchison, Topeka & Santa Fe

Ry. Co., 354 P.2d 368 (Kans. 1960); Wendling v. Cundall,

568 P.2d 888 (Wyo. 1977); cf. Clements v. Clements, 91

Idaho 732, 430 P.2d 98 (1967) (absence of findings disre-

garded where facts clear from record). Also, most of the

disputed items of income are “[gjains or losses and divi-

dend and interest income from stock and securities of .. .

foreign or domestic corporation[s].” I.C. § 63-3027(a) (1).

Such items of income are presumed to be “from intangible

property, the acquisition, management, or disposition of

which constitutes an integral part of the taxpayer's trade

or business ;” and this presumption may be overcome only

by “clear and convincing evidence to the contrary.” /d.

Thus we must review the evidence to determine whether the

trial court's findings contrary to that presumption are

supported by clear and convincing evidence. See Ed Sparks

& Sons v. Joe Campbell Constr. Co., 99 Idaho 139, 578

P.2d 681 (1978).

With these principles in mind we turn now to the issues

concerning the application of the business income defini-

19a

tion to the items of income involved in this appeal. We

discuss these issues in terms of the type of income in-

volved.

Dividends: With respect to the dividends involved here,

the critical question is whether this income arose from

ASARCO’s business activities and whether ASARCO’s

acquisition, management or disposition of the underlying

stock constitutes an integral or necessary part of its min-

ing, smelting and refining business,

The district court ruled that the commission erred in

classifying the dividends as business income, stating:

“The next question is whether the dividends, inter-

est, patent royalties and capital gains, together with

rental income, were subject to tax by the State of

Idaho as business income. The court has reviewed the

facts and the authorities submitted by the parties and

has concluded that they are not. American Smelting

and Refining Company is in the business substantially

of mining, smelting and refining and sales. The income

described does not come from property or activities

which is an integral part of taxpayer’s trade or busi-

ness. Plaintiff's position is well taken in that it would be

unreasonable, unfair and contrary to the law to allow

the State of Idaho to throw this income in to be taxed

under the circumstances of this case without allowing

the plaintiff to consider all of the income and all of

the expenses of all of the corporations involved. It

appears to the court that if the dividend income from

other corporations is an integral part of the business

of the plaintiff that they should be unitized and all

matters considered and if they are not that the income

is not business income but is non business income.”

The district court appears to have disapproved of the com-

mnission’s action in including the dividends as business in-

come for two reasons. First, the district court stated that

20a

it was an error to include this income “without allowing

[ASARCO] to consider all the income and all the expenses

of all the corporations involved.” Presumably the trial

court was referring to the fact that the sales, payroll and

property of the dividend-paying corporations were not

represented in the three factor apportionment formula. We

note, however, that although the statute clearly provides

for the apportionment of dividend income when such in-

come falls within the statutory definition of business in-

come, it does not specifically provide for the representa-

tion of the sales, payroll and property of the dividend-

paying corporations in the apportionment formula. See

L.C. § 63-3027(j)-(r). The commission’s apportionment of

the dividends without including the factors of these cor-

porations in the formula did not violate the statutory

provisions. However, the commission’s action does raise

certain constitutional questions which we consider later

in this opinion.

Second, the district court seems to have concluded that

since the corporations which paid the dividends were not

sufficiently connected with ASARCO’s business operations

to justify combining those corporations with ASARCO for

tax reporting purposes pursuant to LC. § 63-3027(s), the

stock ASARCO owned in those corporations was ipso facto

not an integral or necessary part of ASARCO’s trade or

business so as to justify including the dividends they paid

ASARCO as part of ASARCO’s apportionable business in-

come under I.C. § 63-3027(a)(1). When corporations are

combined under subsection (s) for tax reporting purposes,

the dividends paid one corporation by the other are not

considered income but, as the commission did in this case,

are properly treated as intracompany transfers. The dis-

trict court’s reasoning, therefore, would preclude dividends

from ever being classified as business income and is thus

clearly inconsistent with subsection (a)(1) which pre-

sumes that dividends are business income. The effect of this

reasoning would nullify the statutory provision, a result

2la

we must avoid if possible. Magnuson v. Idaho State Tax

Commission, 97 Idaho 917, 556 P.2d 1197 (1976).

However, these provisions are not necessarily incon-

sistent. They have different objectives and they can be

read harmoniously if those objectives are kept in mind.

The combined reporting provision of subsection (s) is a

further refinement of the basic apportionment principle.

Its purpose is to permit application of the UDITPA for-

mula to a single business enterprise which is conducted

by means of separately incorporated entities. See United

States Steel Corp. v. Multistate Tax Commission, ——

US. —, ——, n. 25, 98 S.Ct. 799, 813, n. 25 (1978). In an

economic sense such a business is no different than a

similar business composed of a single corporation with

several separate divisions. Compare Butler Bros. v. Me-

Colgan, supra, with Edison California Stores, Ine. v. Me-

Colgan, 183 P.2d 16 (Cal. 1947). For tax reporting pur-

poses such businesses should be treated the same. Coca

Cola Co. v. Department of Revenue, 533 P.2d 788 (Ore.

1975); Keesling, A Current Look at the Combined Report

and Uniform Allocation Practices, 42 J.Tax. 106 (1975).

In contrast, subsection (a)(1), which authorizes the

apportionment of a taxpayer’s dividend income in certain

circumstances, addresses a very different question. While

the combined reporting provision concerns a proper iden-

tification of the contours of the business enterprise, the

business income definition of subsection (a) (1) concerns the

differentiation between truly passive investment income

and income which is incidental to or connected with the

taxpayer’s business operations. These are two related but

conceptually and legally very different questions. Simply

because the management, operation and activity of a cor-

poration in which the taxpayer owns stock is not so closely

connected with the management, operation and activities

of the taxpayer to warrant a combined tax return, does

not ipso facto mean that the dividends the taxpayer re-

22a

ceives from that stock cannot be “income arising from

transactions and activities in the regular course of the

taxpayer's trade or business” and that the “acquisition,

management, or disposition” of the stock does not “con-

stitute integral or necessary parts of the taxpayer's trade

or business operations.” I.C. § 63-3027(a)(1). The com-

bined reporting provision and the business income defini-

tion serve different purposes, ask different questions and

apply different standards. The answer to one does not

necessarily imply the same answer to the other.

With respect to the dividends ASARCO received from

Southern Peru Copper Corp.; M.I.M. Holdings, Ltd.; Gen-

eral Cable; Revere Copper; ASARCO Mexicana, S.A.; and

Compania American Smelting, S.A., we conclude that the

record does not contain clear and convincing evidence to

rebut the statutory presumption and does not support the

trial court's finding that those dividends were not business

income. For the years in question ASARCO owned a con-

trolling or at least a very substantial interest in each of

these corporations. They are all engaged in businesses

closely related to ASARCO's mining and smelting opera-

tions and, with the exception of M.I.M., ASARCO did a

substantial amount o/ business with them and provided

them with a variety of technical services. The clear infer-

ence from these facts is that ASARCO’s interest in these

companies was not merely that of a passive investor but

that this dividend income arises from ASARCO’s mining

and smelting business and that ASARCO acquired and

maintained its ownership interest in these companies as

an integral and necessary part of its mining and smelting

business. We recognize that M.I.M., for the years in ques-

tion, seems to have operated independently of ASARCO

and did little if any business with ASARCO. Although

ASARCO owns a controlling interest in M.I.M., ASARCO

did not exercise its right to control the corporation, ap-

parently for political reasons. Nevertheless, ASARCO does

own a majority of M.I.M. stock and M.I.M. is engaged in

23a

virtually the same business as ASARCO. Given these facts

and the statutory presumption we conclude that the trial

court erred in concluding that ASARCO’s interest in

M.I.M. was merely a passive investment unrelated to

ASARCO’s mining and smelting business.

However, we conclude that there was clear and convine-

ing evidence to sustain the trial court’s finding that the

dividends from Lake Asbestos, ASARCO Int., Hecla Min-

ing Co., Kennecott Copper Co., Phelps-Dodge and United

Park City Mines were not business income. Although the

record indicates certain management connections between

ASARCO and Lake Asbestos and ASARCO Intl. the rec-

ord indicates that this asbestos mining and processing activ-

ity is distinct, separate and unrelated to ASARCO’s general

mining and smelting business. Regardless of whether the

dividends these corporations paid ASARCO would have

constituted business income with respect to an asbestos

business, the record discloses that these asbestos operations

have no connection with the trade or business ASARCO

conducts. Therefore, that dividend income is not business

income subject to apportionment by this state. See Sperry

& Hutchinson Co. v. Department of Revenue, supra.

The four remaining companies from which ASARCO

received dividends are all engaged in mining activities

similar to those pursued by ASARCO. Nevertheless,

ASARCO’s stock ownership in those companies is so small

and its business dealings with them are so insignificant

that, despite the statutory presumption, we conclude that

the trial court’s finding that ASARCO’s ownership of that

stock was more of a separate investment activity than a

part of its trade or business operations is supported by the

evidence. Therefore, the dividends these companies paid

ASARCO should not have been included as business in-

come.

24a

Interest:* In general, the source of ASARCO’s interest

income was customer notes and other obligations ASARCO

received in the regular course of its mining and smelting

operations. As such, they were therefore properly con-

sidered as business income by the commission, and the trial

court’s findings to the contrary are not supported by the

evidence. See Montana Department of Revenue v. American

Smelting & Refining Co., supra; Sperry & Hutchinson Co.

v. Department of Revenue, supra; Champion International

Corp. v. Bureau of Revenue, supra; cf. Great Lakes Pipe

Line Co. v. Commissioner of Taxation, 188 N.W.2d 612

(Minn. 1965) (interpreting statute analogous to UDITPA),

appeal dismissed 384 U.S. 718 (1966).

Rents: ASARCO’s rental income was primarily derived

from property used in or very closely related to its mining

and smelting operations. Accordingly, the trial court erred

in excluding rents from business income. I.C. § 63-3027(a)

(1) and (d). See Montana Department of Revenue v.

American Smelting & Refining Co., supra; Champion Inter-

national Corp. v. Bureau of Revenue, supra.

Royalties: The record indicates that the assets generat-

ing ASARCO’s royalty income were acquired or developed

by ASARCO in the course of its regular business opera-

tions. This income was related to or a consequence of its

business operations and was therefore properly considered

business income by the commission. See Montana Depart-

ment of Revenue v. American Smelting & Refining Co.,

supra; cf. Texaco, Inc. v. Wasson, 237 S.E.2d 75 (S.C.

1977) (interpreting statute analogous to UDITPA).

*The presumption of business income in I.C. § 63-3027(a) (1)

extends only to ‘‘gains and losses and dividends and interest in-

come from stock or securities of any foreign or domestic corpora-

tion. . . .’’ It does not apply to gains and losses and interest in-

come from other sources or to rents and royalties. With respect to

income not encompassed by the statutory presumption, ASARCO,

as the plaintiff, bore the usual burden of persuading by a pre-

ponderance of the evidence.

25a

Capital gains and losses: As previously mentioned,

ASARCO’s capital gains and losses resulted from the dis-

position of three types of assets: fixed assets, short term

notes and bonds, and securities.

The fixed assets were used in ASARCO’s everyday busi-°

ness activities and therefore gains realized on their dispo-

sition were business income. The trial court’s finding to the

contrary is not supported by the evidence.

The notes and bonds represented the short term invest-

ment of idle funds until they were needed in ASARCO’s

ordinary business operations. Accordingly, the trial court

erred in not considering the gains realized from the dispo-

sition of those notes and bonds as business income. See

Montana Department of Revenue v. American Smelting &

Refining Co., supra; Sperry & Hutchinson Co. v. Depart-

ment of Revenue, supra; Champion International Corp. ~

v. Bureau of Revenue, supra; cf. Great Lakes Pipe Line

Co. v. Commissioner of Taxation, supra.

ASARCO also realized gains from the sale of stock in its

subsidiaries and General Cable. In our view the same stand-

ard applies to the question whether gains from the sale

of stock are business income as applies to the question

whether dividends from the stock are business income. The

focus of the inquiry should be upon the purpose and use

of the stock by ASARCO prior to its disposition. See LC.

§ 63-3027(a)(1); Montana Department of Revenue v. Amer-

ican Smelting & Refining Co., supra; Champion Interna-

tional Corp. v. Bureau of Revenue, supra; cf. Johns-Mans-

ville Products Corp. v. Commissioner of Revenue Admin-

istration, 343 A.2d 221 (N.H. 1975) (similar approach, but

not interpreting UDITPA), appeal dismissed 423 U.S.

1069 (1976). Inasmuch as we have already concluded that

the trial court’s conclusion that ASARCO sustained its

burden of proving by clear and convincing evidence that

the dividends it received from this stock were not business

income is not supported by the evidence, we similarly con-

26a

clude that the trial court's conclusion that the gains and

losses realized on the disposition of the stock were not

business income is not supported by the record.

Having resolved these issues concerning the items of

ASARCO’s income which are properly apportionable under

the Idaho version of UDITPA, we consider now the con-

stitutional questions.

B

Constitutional Issues

The constitutionality of formulary apportionment is

firmly established under both the due process and com-

merce clauses of the United States Constitution. Moorman

Mfg. Co. v. Bair, US. , 98 §.Ct. 2340 (1978) ; Gen-

eral Motors Corp. v. District of Columbia, 380 U.S. 553,

85 S.Ct. 1156 (1965); Bass, Ratcliff & Gratton, Ltd. v.

State ‘ax Comm., 266 U.S. 271, 45 S.Ct. 82 (1924).

ASARCO does not attack the constitutionality of formu-

lary apportionment in the abstract, but argues that the

manner in which the commission applied the UDITPA

formula in this case produced a result violative of the

due process and commerce clauses, We consider first the

issues raised under the due process clause and then those

raised under the commerce clause,

The Supreme Court of the United States recently sum-

marized the limitations imposed by the due process clause

on the states’ power to tax the income of interstate busi-

NESSES:

“The Due Process Clause places two restrictions on a

State’s power to tax income generated by the activities

of an interstate business, First, no tax may be imposed

unless there is some minimal connection between those

activities and the taxing state... . Second, the income

attributed to the State for tax purposes must be ra-

tionally related to ‘values connected with the taxing

27a

state.’”” Moorman Mfg. Co. v. Bair, —— U.S. —,

——, 98 S.Ct. 2340, 2344 (1978) (citations omitted).

In the context of the first due process restriction,

ASARCO argues that the commission imposed a tax on

income derived from sources and activities which have no

connection with this state. In particular, ASARCO refers

to the apportionment of dividends it received. ASARCO

argues that these dividends are derived from the business

activities of the dividend-paying corporations and that

these corporations have no connection with Idaho, This

argument, however, rests upon a misconception of what

the state sought to tax. As the Vermont court recently

ruled in In re Goodyear Tire & Rubber Co., 335 A.2d 310

(Vt. 1975):

“Goodyear’s constitutional argument rests on its alle-

gations that its extra-territorial values are being

taxed. This allegation, however, fails to distinguish the

foreign dividend income that Goodyear receives from

its subsidiaries from the profits those subsidiaires re-

alize from their own business activities conducted

without the borders of Vermont. The right to receive

dividends is incident to the ownership of stock. La-

Fountain & Woolson Co, v. Brown, 91 Vt. 340, 342, 101

A. 36 (1917). Profits, on the other hand, are the net

proceeds obtained by deducting from the gross pro-

ceeds all forms of expense or outlay involved in, or in-

eidental to, the business in question, Stratton v. Cart-

mell, 114 Vt. 191, 195, 42 A.2d 419 (1945).

“The failure of the county court to make a finding on

the issue of whether Goodyear'’s subsidiaries were op-

erated as separate entities does not constitute error

because of the lack of relevance such a finding has to

the taxation of foreign dividend income, Vermont's

corporate income tax does not seek to tax the profits

28a

realized from the business activities of Goodyear’s

subsidiaries conducted without the borders of Ver-

mont. It is taxing only the dividend income realized by

Goodyear itself.” /d, at 311-12,

See F. W. Woolworth Co. v. Commissioner of Taxes, 328

A.2d 402 (Vt. 1974); Guif Oil Corp. v. Morrison, 141 A.2d

671 (Vt. 1958). The commission did not levy a tax upon the

income of the dividend-paying corporations; rather, it levied

a tax upon ASARCO’s income. Those dividends are clearly

part of ASARCO’s income and it is unquestioned that there

is a sufficient connection between ASARCO and this state

to constitutionally permit the state to tax its proper share

of ASARCO’s income. If the due process clause were to

prohibit the inclusion of dividends in a taxpayer’s taxable

income unless the payor corporation also conducts business

within the taxing state, the due process clause would logi-

cally also prohibit the taxpayer’s domicile from taxing

those dividends if the payor corporation did not conduct its

business within the domiciliary state, and indeed it would

prohibit the United States and any state from ever taxing

dividends paid the taxpayer by a corporation whose activi-

ties are located entirely without this country. The due

process clause simply does not limit the right to tax divi-

dends paid a taxpayer to the jurisdictions in which the

payor corporation conducts its business, We believe that

any constitutional limitations upon a state’s right to ap-

portion the intangible income, including dividends, of a

multistate corporation doing business within the state are

satisfied by the Idaho statutory requirement that the acqui-

sition, management or disposition of the underlying asset

must be an integral or necessary part of the taxpayer’s

unitary business, a part of which is conducted in this state.

See In re Goodyear Tire & Rubber Co., supra; F. W. Wool-

worth Co. v. Director of Division of Taxation, 213 A.2d

1 (N.J. 1965) ; Great Lakes Pipe Line Co. v. Commissioner

of Taxation, 138 N.W.2d 612 (Minn. 1965), appeal dis-

29a

missed 384 U.S. 718, (1966) ; Champion International Corp.

v. Bureau of Revenue, 540 P.2d 1300 (N.M.App.Ct. 1975) ;

cf. National Leather Co. v. Massachusetts, 277 U.S. 413, 48

S.Ct. 534 (1928) (franchise tax measured by capital stock) ;

Cleveland-Cliffs Iron Co. v. Michigan Corporation & Secu-

rities Comm., 88 N.W.2d 564 (Mich. 1958) (franchise tax

measured by capital stock). But see Square D Co. v. Ken-

tucky Bd. of Tax Appeals, 415 S.W.2d 594 (Ky. 1967);

Gulf Oil Corp. v. Clayton, 147 S.E.2d 522 (N.C. 1966).

In the context of the second due process limitation—

that the income attributed to Idaho for tax purposes must

be rationally related to values connected with this state—

ASARCO attacks the commission’s computation of its tax

liability on two grounds. ASARCO first argues that if the

dividends it received are included as apportionable business

income, then the due process clause requires that the prop-

erty, payroll and sales factors of the dividend paying cor-

porations be included in the denominator of the apportion-

ment formula; otherwise ASARCO claims the income ap-

portioned to Idaho would be disproportionate to the income

producing activities within the state. This argument is

premised on the same misconception about the entity and

income the state is attempting to tax that we discussed

above and has been soundly rejected for the same reasons.

F. W. Woolworth Co. v. Commissioner of Taxes, 328 A.2d

402 (Vt. 1974); see also F. W. Woolworth Co. v. Director

of Division of Taxation, 213 A.2d 1 (N.J. 1965).

In any event, I.C. § 63-3027 does not provide for the in-

clusion of the factors of these corporations in the appor-

tionment formula. From a constitutional standpoint, this

argument presents the same question raised by ASARCO’s

second argument that, regardless of whether the apportion-

ment formula was properly computed, in this case it pro-

duced a result violative of the due process clause. The

United States Supreme Court recently summarized the

burden ASARCO must sustain in order to prevail on this

argument:

30a

“... But in neither Hans Rees’ nor Norfolk € Western

did the Court depart from the basic principles that the

States have wide latitude in the selection of appor-

tionment formulas and that a formula-produced assess-

ment will only be disturbed when the taxpayer has

proved by ‘clear and cogent evidence’ that the income

attributed to the State is in fact ‘out of all appropriate

proportion to the business transacted . .. in that State.’

283 U.S., at 135, or has ‘led to a grossly distorted re-

sult.’ 390 U.S., at 326. Moorman Mfg. Co. v. Bair, ——

U.S. ——, 98 S.Ct. 2340, 2345 (1978).

ASARCO’s arguments in this respect are based upon a

comparison of the income apportioned to Idaho by the

formula with the income ASARCO claims was actually

earned by its Idaho operations as evidenced by its own

separate accounting analysis. For example, ASARCO’s

separate accounting analysis shows a loss of $1,464,885

from its Idaho operations in 1969. This loss was primarily

from its exploration and development activities. Testimony

indicated that some of its Idaho operations operated at a

profit. However, the apportionment formula attributed

$2,274,750, or 2.53% of ASARCO’s business income in

1969, to Idaho.

In general, multistate businesses have been remarkably

unsuccessful in attacking the results of apportionment

formulas by comparing those results with those of a sep-

arate accounting anaiysis. See, ¢.g., Butler Bros. v. MeCol-

gan, 315 U.S. 501, 62 S.Ct. 701 (1942); John Deere Plow

Co. v. Franchise Tax Bd., 238 P.2d 569 (Cal.), appeal dis-

missed 343 U.S. 939 (1951) ; Walgreen Co. v. Commissioner

of Taxation, 104 N.W.2d 714 (Minn. 1960); Crane Co. v.

Carson, 234 S.W.2d 644 (Tenn.), cert. denied 340 U.S. 906

(1950). But see Hans Rees’ Sons, Inc. v. North Carolina,

283 U.S. 123, 51 S.Ct. 385 (1931) (formula which taxed

80% of income while only 17% had actual source in state).

The reason why such arguments generally fail is explained

3la

in the United States Supreme Court’s decision in Butler

Bros.:

“It is true that appellant’s separate accounting sys-

tem for its San Francisco branch attributed no net

income to California. But we need not impeach the in-

tegrity of that accounting system to say that it does

not prove appellant’s assertion that extraterritorial

values are being taxed. Accounting practices for in-

come statements may vary considerably according to

the rioblem at hand. ... A particular accounting sys-

tein, though useful or necessary as a business aid, may

not fit the different requirements when a State seeks

to tax values created by business within its borders.

... That may be due to the fact, as stated by Mr. Jus-

tice Brandeis in Underwood Typewriter Co. v. Cham-

berlain, 254 U.S. 113, 121, 41 S.Ct. 45, 47, 64 L.Ed.

165, that a State in attempting to place upon a busi-

ness extending into several States ‘its fair share of

the burden of taxation’ is ‘faced with the impossibility

of allocating specifically the profits earned by the

processes conducted within its borders.’ Furthermore,

the particular system used may not reveal the facts

basic to the State’s determination. ... In either aspect

of the matter the results of the accounting system

employed by appellant do not impeach the validity

or propriety of the formula which California has ap-

plied here.” 315 U.S. at 507-08, 62 S.Ct. at 704 (cita-

tions omitted).

Accordingly, the constitutional question is not whether the

result reached by the apportionment formula is grossly

disproportionate to the result reached by ASARCO’s sep-

arate accounting analysis, but the proper question is

whether ASARCO has established by clear and cogent evi-

dence that the income attributed to the state by the appor-

tionment formula is in fact “out of all appropriate propor-

32a

tion” to ASARCO’s business activities in the state. In our

view ASARCO has not sustained that burden.

The essence of ASARCO's argument under the commerce

clause is that since Idaho's use of the UDITPA apportion-

ment formula may result in the duplicative taxation of its

income by other states, the statute places an unconstitu-

tional burden on interstate businesses. In particular,

ASARCO emphasizes that since many states allocate in-

come from intangible and tangible property to a single

jurisdiction, the apportionment by Idaho of the same in-

come will result in multiple taxation. However, ASARCO

has not established that it was in fact subject to multiple

taxation and the possibility of such double taxation has

been rejected as a ground for invalidating an apportion-

ment statute. Moorman Mfg. Co. v. Bair, supra. Moreover,

the courts have consistently held that the possibility of

overlapping taxation does not present constitutional prob-

lems so long as the state’s formula, considered on its own

merits, is not repugnant to the Constitution. See Moorman

Mfg. Co. v. Bair, supra; General Motors Corp. v. State,

509 P.2d 1260 (Colo. 1973); Hellerstein, Symposium Fore-

word, State Taxation Under the Commerce Clause: An

Historical Perspective, 29 Vand.L.Rev. 335, 347 (1976).

As the Court in Moorman stated:

“This method [formula apportionment], unlike sep-

arate accounting, does not purport to identify the pre-

cise geographical source of a corporation’s profits;

rather, it is employed as a rough approximation of a

corporation’s income that is reasonably related to the

activities conducted within the taxing State. The single-

factor formula used by Iowa, therefore, generally will

not produce a figure that represents the actual profits

earned within the State. But the same is true of the

Illinois three-factor formula. Both will occasionally

over-reflect or under-reflect income attributable to the

taxing State. Yet despite this imprecision, the Court

33a

has refused to impose strict constitutional restraints

on a State’s selection of a particular formula. ——

U.S. at ——, 98 S.Ct. at 2344.

We find no constitutional infirmity under the commerce

clause in the statute before us in this case. The problem

raised by ASARCO is essentially the result of the lack of

uniformity between the states. It would indeed be ironic

for us to strike down this statute, which is patterned after

a widely adopted uniform act drafted in an attempt to

provide some uniformity in this area, on the grounds that

it may be in conflict with the statutes of some other states

which have not adopted the uniform act.

Ill

SALES FACTOR

In computing the sales factor for the tax years in ques-

tion the commission included in the numerator, which rep-

resents the sales attributable to Idaho, intracompany trans-

fers of ore from ASARCO’s mines in Idaho to its smelter

in Montana. The trial court excluded those transfers from

the Idaho sales factor. ASARCO contends that the trans-

fer should not be included in the numerator of the Idaho

sales factor since the statute requires the sales to be re-

ported on a destination basis and Idaho was not the final

destination f these sales. I.C. § 63-3027(p)(1). The com-

mission, however, argues that ASARCO’s accounting

method made it extremely difficult, if not impossible, to de-

termine the sales on a final destination basis and that its

adjustment of the sales factor was a proper exercise of its

authority under I.C. § 63-3027(r) to make adjustments in

the formula when “the allocation and apportionment pro-

visions of this section do not fairly represent the extent of

the taxpayer’s business activity in this state... .”

Although the record is somewhat confusing in this re-

spect, the controversy appears to center on ASARCO’s

“margin method” of accounting, which ascribes the receipts

34a

from the sale of primary metals to the various steps within

its mining, smelting and refining operations. According to

the auditor’s testimony at trial, if ASARCO, for example,

received $6.00 on the final sales of a primary metal, its

margin method of accounting would attribute, for exam-

ple, $3.00 to its mining operation, $1.50 to its smelting op-

eration, $1.00 to its refining operation, and the balance of

$.50 to sales or sales commission,

The auditor appears to have encountered two problems

in computing the sales factor with records maintained on

this basis. First, I.C. § 63-3027(a)(5) and (0) require that

the sales factor be computed on a gross receipts basis. The

auditor testified that the total sales computed under this

margin method of accounting would be the same as when

computed on a gross receipts basis only if the ore was first

extracted from ASARCO’s mines. Where the ore was pur-

chased from other mines, the auditor concluded that

ASARCO’s accounting method would reflect only the total

value of the services ASARCO performed in smelting, re-

fining and selling the ore, which in our example would be

$3.00, and not the total gross receipts ASARCO would

receive on the final sale of the product, $6.00 in our exam-

ple.

Second, in general UDITPA requires that sales be re-

ported in the numerator only if the goods were shipped

to a purchaser in the taxing state. See 1.C. §§ 63-3027(p) (1)

and -3027(p)(2). Although this margin method of account-

ing would presumably indicate the value of the services

performed by ASARCO’s various operations in the various

states, the auditor concluded that the records ASARCO

maintained using this accounting method did not allow him

to ascertain the final destination of ASARCO’s sales of

primary metals.

Because of these difficulties in using ASARCO’s account-

ing method, the MTC auditor adjusted the numerator of

the Idaho sales factor to include the value of ore shipped

35a

from ASARCO’s mines in Idaho to its smelter in Montana.

However, these transfers of ore were clearly not true sales

but merely intracompany transfers. Nevertheless, the audi-

tor apparently believed this adjustment was necessary be-

cause of his inability to compute the sales factor according

to the statutory method and in order to make the compu-

tation of the numerator consistent with ASARCO’s margin

method of accounting and its computation of the denomi-

nator.

The trial court did not address the propriety of this ad-

justment. However, we believe that the apportionment for-

mula should be computed according to the procedures set

forth in the statute unless use of these procedures in a

particular case is impossible or entirely impractical or un-

less it is clearly established that the result produced by the

statutory formula does “not fairly represent the extent

of the taxpayer’s business activity in this state... .” LC.

§ 63-3027(r). We therefore remand this issue to the district

court for further proceedings to determine whether the

sales factor can be computed according to the statutory

method. If on remand the court concludes that it cannot

or that it produces a result which manifestly does not rep-

resent the extent of ASARCO’s activity in the state, the

court is to determine whether the adjustment made by the

commission was a reasonable exercise of its authority under

LC. § 63-3027 (r).

The case is reversed and remanded for further proceed-

ings and for recomputation of ASARCO’s income tax lia-

bility in accordance with this opinion.

Reversed and remanded.

Sueparp, C., McFappen, Donaupson and Bistiine, JJ.,

concur.

36a

In toe District Court or tur Fourtrna Juprcia, District

or THE State or Ivano, IN anv For THE County or Apa

Case No, 53182

American SMELTING AND Rerinino Company, Plaintiff,

vs

Ipano Stare Tax Commission, Defendant.

Plaintiff filed suit alleging that the Idaho State Tax

Commission had improperly determined income tax defi-

ciencies and interest against the plaintiff for the years

1968, 1969, and 1970 in that deficiencies and interest

charges had been assessed against the plaintiff by reason

of income which plaintiff derived from dividends, interest,

patent royalties and capital gains subject to tax by the

State of New York, the commercial domicile of the plaintiff.

This matter came on for hearing and was submitted to

the court upon the stipulation of the parties and the evi-

dence that had been presented. The parties have presented

their briefs. The primary questions appear to be first

whether the tax commission properly combined the plain-

tiff with six of its wholly own subsidiaries which con-

stitute a unitary business enterprise.

The court has reviewed this matter and could spend con-

siderable time discussing the matter which I don’t think

would be beneficial to either of the parties or the Supreme

Court where this matter is obviously headed. The court

has concluded that the plaintiff and the six subsidaries do

constitute a unitary business enterprise and were properly

so treated for tax purposes.

The next question is whether the dividends, interest,

patent royalties and capital gains, together with rental

37a

income, were subject to tax by the State of Idaho as busi-

ness income. The court has reviewed the facts and the

authorities submitted by the parties and has concluded

that they are not. American Smelting and Refining Com-

pany is in the business substantially of mining, smelting

and refining and sales. The income described does not

come from property or activities which is an integral part

of taxpayer’s trade or business. Plaintiff’s position is well

taken in that it would be unreasonable, unfair and con-

trary to the law to allow the State of Idaho to throw this

income in to be taxed under the circumstances of this case

without allowing the plaintiff to consider all of the income

and all of the expenses of all of the corporations involved.

It appears to the court that if the dividend income from

other corporations is an integral part of the business of the

plaintiff that they should be unitized and all matters con-

sidered and if they are not that the income is not business

income but is non business income.

Counsel for the plaintiff may prepare such Findings of

Fact and Conclusions of Law and Order as is necessary

in conformance with this opinion.

Dated this 13th day of November, 1975,

/8/ Marion J. CaLuisTer

Marion J. Callister

District Judge

38a

In tHe District Couvrr or tue Fourrsa JupiciaL District

or THE State or [pauo, In aND ror THE County or Apa

Case No. 53182

American SMELTING AND Rerinino Company, Plaintiff’,

vs

Ipano State Tax Commission, Defendant.

FINDINGS AND CONCLUSIONS

The court being fully advised in the premises, after

having presided at pre-trial hearings, heard presentations

of evidence at trial and argument and reviewed various

briefs of the parties does hereby make the following:

Findings of Fact

1. The court has jurisdiction of the matters involved in

this controversy and of the parties.

2. The court adopts and incorporates as if set out herein

the stipulations of fact entered into, agreed upon, executed

and entered into the record by the parties and the facts

recited in the pre-trial order agreed upon by the parties

and signed by the court.

3. Deficiency assessments against the plaintiff for the

year 1968 in the amount of $92,471.88; 1969 in the amount

of $111,292.44; and 1970 in the amount of $121,750.76 are

the subject matter of this litigation.

4, The plaintiff utilizes separate accounting for internal

purposes, uses this method for determining and reporting

its taxable income for federal tax purposes and this method

accurately reflects the plaintiff’s taxable income in the

State of Idaho.

39a

5. The State Tax Commission is apportioning all income

of taxpayer as business income and through apportionment

taxing a portion of all plaintiff's income.

6. Plaintiff uses a separate accounting method using a

margin’s system. Plaintiff’s taxable income in Idaho deter-

mined by separate accounting and plaintiff's taxable income

in Idaho determined by apportionment method applied by

the State Tax Commission in asserting the deficiency for

the separate years involved in this case is:

Separate Accounting Apportionment Difference

1968 ($290,304.00) $1,541,198.00 — $1,831,502.00

1969 ($1,464,885.00) $2,274,750.00 — $3,373,835.00

1970 = ($2,292,929.00) $2,162,346.00 $4,455,275.00

7. The plaintiff is in the business of mining of copper

and non-ferrous metals, gold, silver, copper, lead, zine and

asbestos, and in smelting and refining and selling these

metals and in the sale of secondary metals. For the years

involved, the percentage of operating income realized by

plaintiff from its separate business operations is set out

below

1968 1969 1970

Mining 66% 59% 76%

Smelting & Refining 33% 38% 22%

Secondary Metals 1% 3% 2%

Mining earnings from separate minerals mined are:

1968 1969 1970

Copper 86% 88% 91%

Lead and Zine 12% 11% 7%

Silver 2% 1% 2%

40a

8. Plaintiff’s fixed asset investment in the separate busi-

nesses reflect the following percentages:

Mining 61%

Smelting and Refining 35%

Secondary Metals 4%

9. Plaintiff’s principal business in Idaho is the mining

of silver; it also mines lead and zinc, operates an admin-

istrative office for its northwest mining division and sells

secondary metals in Idaho.

10. The silver mine operated by plaintiff in [daho is the

only silver mine owned or operated by plaintiff.

11. The plaintiff sells no primary metals, the destination

of which is Idaho. Plaintiff sells secondary metals the

destination of which is Idaho and for the years involved

the sales were:

1968 $ 70,000.00

1969 $ 70,000.00

1970 $108,000.00

12. Plaintiff’s mining operations in the northwest are

limited to lead and zine mines and the silver mine which

it operates in Idaho.

‘13. Plaintiff’s northwest mining division experienced

losses for the years involved in the following amounts:

1968 ($ 660,423.00)

1969 ($2,880,727.00)

1970 ($3,161,775.00)

14. Plaintiff does not smelt or refine ore produced in its

Idaho mines in Idaho. This ore is shipped to smelters

operated by the plaintiff in Fast Helena, Montana; El Paso,

4la

Texas; and Selby, California. For the years involved, ore

was shipped in the following proportions:

East Helena El Paso Selby

1968 8.6% 40.7% 50.7%

1969 0% 56.5% 43.5%

1970 18.1% 58.3% 23.6%

15, For the years involved plaintiff's before tax earnings,

including income from intangibles, and dividends paid by

plaintiff to its shareholders were:

1968 1969 1970

Before tax earnings $80.6 mil. $101 mil. $102.5 mil.

Dividends paid $38.2 mil. 55.2 mil. 53.9 mil.

Dividends as a percentage

of earnings 48% 55% 53%

16. Plaintiff has never been required to utilize its stock

as security for borrowing of working capital, acquiring

stock or securities in other companies or to support any

bond issues.

17. The taxpayer has sufficient cash flow from mining to

provide operating capital for all mining operations without

reliance upon cash flow from smelting, refining, sale of

secondary metals or income from intangibles.

18. Plaintiff is the major custom smelter in the United

States, doing approximately 80% of that work in this

country.

19. Asarco Mereantile and International Metal Company

are shell companies fully owned by the plaintiff, staffed,

direeted and controlled by plaintiff and using facilities

owned by it and are subject to internal auditing by plain-

tiff. This subsidiary and the plaintiff constitute a unitary

business.

42a

20. Lone Star Lead Construction Company is wholly

owned by plaintiff, staffed by plaintiff's employees, occu-

pies facilities owned by plaintiff, identifies itself with its

parent in advertising and does not operate independently

of the plaintiff. This subsidiary and the plaintiff constitute

a unitary business,

21. Enthone, Inc., is wholly owned by plaintiff, identifies

itself with plaintiff in advertising, does not operate inde-

pendently of the plaintiff and is subject to internal auditing

by plaintiff. This subsidiary and the plaintiff constitute a

unitary business.

22. Federated Metals is wholly owned and provided

financing by plaintiff, does not operate independently of

the plaintiff and is subject to internal auditing by plaintiff.

This subsidiary and the plaintiff constitute a unitary

business.

23. Northern Peru is wholly owned by plaintiff, does not

operate independently of the plaintiff and is subject to

internal auditing by plaintiff. This subsidiary and the plain-

tiff constitute a unitary business.

24. The combination of ownership and use through con-

trolled operation is sufficient to require combination or

unitization of these six companies with the plaintiff to

accurately reflect income,

25. Asareco Australia, Asarco Development, Asarco Ex-

ploration, Compania American Smelting, S. A., Lake As-

bestos of Quebec and Asarco International are wholly

owned by plaintiff and are subject to control by plaintiff

but are not integral or necessary parts of the plaintiff's

business operations.

26. Neptune Gold Mining Company is 51.8% owned by

plaintiff, is operated by plaintiff pursuant to contract but

operates independently of plaintiff. Neptune Gold Mining

Company is neither an integral part of plaintiff’s business

43a

nor necessary to plaintiff’s business and prudent judgment

does not dictate ownership of this stock.

27. Southern Peru Copper Sales is 51.5% owned by

plaintiff, staffed by plaintiff’s employees and is subject to

control of plaintiff but is not an integral or necessary

par of plaintiff’s business operations which prudent busi-

ness judgment dictates should be owned by plaintiff.

28. Asarco Mexicana is 49% owned by plaintiff, operates

independently of plaintiff and is not an integral part of

nor necessary to plaintiff’s business and prudent business

judgment does not dictate ownership of this stock.

29. Southern Peru Copper is 51.5% owned by plaintiff,

subject to a management contract which insures that plain-

tiff will not be able to control said company, operates inde-

pendently of piuintiff and is not an integral part of nor

necessary to plaintiff’s business nor does prudent business

judgment dictate ownership of this stock.

30. M.I.M. Holdings is 52.7% owned by plaintiff, operates

entirely independently of and has minimal contact with

plaintiff, is not an integral or necessary part of plaintiff’s

business nor does prudent business judgment dictate own-

ership of this stock by plaintiff.

31. The court also finds that the other corporations in

which plaintiff has stock interests are not controlled by

plaintiff and are not integral parts of nor necessary to

plaintiff’s business and prudent business judgment does

not dictate ownership of this stock by plaintiff.

32. Plaintiff has sustained its burden of proof and pre-

sented clear and convincing evidence that its income from

intangibles is not business income.

33. The tax imposed pursuant to the method utilized by

the State T'ax Commission, apportioning dividends, inter-

est, capital gains, rents and royalties as business income,

and excluding from the property, sales and payroll factors

44a

all or a proportionate part of the property, sales and pay-

rolls of the corporations the dividends of which are appor-

tioned arbitrarily assigns to Idaho income for tax pur-

poses which does not reflect and greatly exceeds an amount

which would accurately reflect plaintiff’s business in Idaho.

Conclusions of Law

1. The court has jurisdiction of the subject matter and

the parties.

2. Federated Metals of Canada, Asarco Mercantile, Inc.,

Enthone, Inc., International Metal Company, Lone Star

Lead Construction Company and Northern Peru Mining

Company are corporations wholly owned by plaintiff con-

solidation of which is necessary to accurately reflect plain-

tiff’s income within the State of Idaho.

3. Asarco Australia, Asarco Development, Asarco Ex-

ploration, Compania American Smelting S.A., Lake As-

bestos of Quebec, Asarco International, Southern Peru

Copper, Southern Peru Copper Sales, M.I.M. Holdings,

Neptune Gold Mining Company, Asarco Mexicana, General

CAble, REvere Copper, Helea Mining, Kennicott Copper,

Phelps Dodge, United Park City MInes [sic] and other

companies in which plaintiff owns an interest are not in-

tegral to nor a necessary part of plaintiff’s business opera-

tion nor does prudent business judgment dictate ownership

of stock in these companies and plaintiff has met the burden

of proof imposed upon it by statute in that the plaintiff has

presented clear and convincing evidence that its income

from intangibles is not business income.

4. The method used by the State Tax Commission in

apportioning income is not authorized by the statute.

5. Plaintiff's income for 1968, 1269 and 1970 should be

computed by apportioning business income but allocating

45a

income from dividends, interest, royalties, rents and other

non-business income to New York, its commercial domicile.

Daren this 14th day of November, 1975, as of this 15th

day of January, 1976, nune pro tune.

/8/ Marion J. CaLuister

Marion J. Callister

District Judge

The above findings and conclusions are accepted and

ordered entered as a decision of the Ada County District

Court.

/3/ ILLEOBLE

District Judge

46a

Berore THe Tax ComMIsSION or THE STaTE or IpaHo

Docket No. C-340

C-501

In the Matter of the Petition for Redetermination of

Income Tax Deficiency by

American Smevtine & Rerinina Company (ASARCO)

DECISION

Taxpayer protests a Notice of Deficiency Determination

proposing increases to its corporate income or franchise

tax liability for calendar years 1968, 1969 and 1970. Ini-

tially, a Notice of Deficiency Determination was issued on

September 14, 1971, for years 1968 and 1969. That deter-

mination was amended on March 27, 1973, when additional

deficiencies were proposed for each of the initial two years,

and a deficiency was also proposed for the calendar year

1970. (In addition, a deficiency for the calendar year 1967

was proposed, was not protested by the taxpayer, and is

not in issue in this proceeding).

A protest dated April 12, 1973, was filed with the Com-

mission April 18, 1973, objecting to the proposed deficien-

cies on the following grounds:

(a) The proposed deficiency incorrectly classified tax-

payer and six of its subsidiary or affiliated corporations

as a unitary enterprise pursuant ‘o § 63-3027(s), Idaho

Code. The six subsidiary or affiliated corporations are:

(1) Federated Metals Canada Ltd. (2) ASARCO Mercan-

tile Co. (3) Enthone, Ine. (4) International Metal Co. (5)

Lone Star Lead Construction Corp. (6) Northern Peru

Mining.

(b) The proposed deficiency incorrectly treated certain

dividends (including dividends other than those received

from the above six corporations), interest, patent royalties,

47a

and capital gains as business income as such term is defined

in § 63-3027, Idaho Code.

(c) Because the audit was in part conducted by the

Multistate Tax Commission, and the Multistate Tax Com-

pact is unconstitutional, the State Tax Commission may

not, therefore, base an assessment upon the information

obtained in the course of such audit.

In addition, the taxpayer, by a brief or ‘‘position’’ state-

ment, attempted to add an additional objection to a portion

of the proposed assessment imposing penalties on taxpayer.

Such objection should have been raised by protest. how-

ever, it does not appear the staff has been prejudiced by

the failure to include such objection in the protest and the

protest or objection to the proposed assessment will be

considered by the Commission.

The effect of the auditor’s adjustment was to treat tax-

payer and the six affiliated companies listed earlier in this

Decision as a unitary business enterprise, combining such

corporations into one entity or unit for accounting pur-

poses, and to utilize the three factor formula provided by

§ 63-3027, Idaho Code, to determine what part of such

unitary enterprise’s income was properly attributable to

Idaho. In addition, the auditor treated dividend income;

interest, patent royallies, and capital gains received by

members of the unitary enterprise as business income.

Finally, the auditor imposed a penalty of 5 percent of the

amount of the total deficiency based upon an erroneous

reporting of part of a property factor during the year

1968.

The issue of the penalty imposed may be readily disposed

of. During 1968 taxpayer had an inventory of ore. The

inventory of ore was physically located within the state of

Idaho and for Montana tax purposes was reported as being

outside Montana, (and presumably within the state of

Idaho). However, for Idaho tax purposes the inventory

48a

was reported as not being within the state of Idaho, and

such inventory was not included in data supposedly sum-

marizing all Idaho property. There is no evidence indi-

cating that a deliberate or willful misrepresentation to

either state was intended; however, the error, while inno-

cent, was not one that would be made by a reasonably

prudent accountant in preparing the information needed.

§ 63-3046, Idaho Code, directs the assessment of a 5 percent

penalty ‘‘if any part of any deficiency is due to negligence

or disregard of rules and regulations’’ and Regulation 45

indicates that ‘‘any failure to file a tax return or to pay

a tax lawfully due is presumed to be a result of negligence

or disregard of the law, rules and regulations’’. In view of

the statute, the penalty might seem to be ‘‘automatic’’;

however, practical experience the Commission has gained

in administration of the tax laws of the state of Idaho indi-

cates that each particular situation in which penalties have

been assessed should be reviewed closely; we believe the

proper objective is to both require full and honest dis-

closure from taxpayers by making it uneconomical to pro-

vide less than full and accurate disclosure, and at the same

time not to unduly or unreasonably penalize taxpayers who

have diligently attempted to comply with relevant statutes.

In the present instance the Commission believes that the

penalty should be imposed; however, the amount of the

penalty should be restricted to the difference between the

taxes due under taxpayer’s initial reporting, and the taxes

that should have been due if the information had been

correctly reported. The effect of such a reduction is to make

the penalty in this case commensurate with the magnitude

of the error, and not to unduly penalize taxpayer because

there were substantial other adjustments made at the same

time as the adjustments warranting a penalty.

The remaining two issues are to some extent inter-

related. In its protest, taxpayer objects tu .he treatment

of ASARCO itself and the six corporations (hereafter re-

ferred to as the unitary subsidiaries) being combined for

49a

accounting purposes. Such protest at some length objects

to and points out why the taxpayer does not view such a

unitary enterprise to be correct characterization. Later

briefs, however, filed by the taxpayer do not treat this

issue. In fact, if the Commission has correctly character-

ized dividends from the non-unitary enterprise corporations

as business income, and if in fact the dividends from the

unitary enterprise corporations would be business income

to ASARCO itself, then the combination of the six unitary

enterprise corporations with ASARCO to some extent de-

creases total tax liability to Idaho.

The doctrine of treating a series of inter-related corpo-

rations as a “unitary enterprise” is well established by

judicial precedent. The doctrine originated in California,

Butler Bros. v. McColgan, 315 U.S. 501, 62 S.Ct. 701, Edison

California Stores v. McColgan, 183 P. 2nd 16 (Calif.) but

today has been accepted in a number of jurisdictions.

Zale-Salem, Inc. v. State Tax Commission, 237 Or. 261, 391

P. 2nd 601 (1964), Interstate Finance Corp. v. Wisconsin

Department of Taxation, 28 Wis. 2nd 262, 137 N.W. 2nd

38 (1965). We believe § 63-3027(s), Idaho Code, was specifi-

cally intended to recognize the validity of the concept,

which is grounded on the premise that corporations which

do not in fact operate as independent business enterprises

can only be effectively taxed as unitary business enter-

prises. In the present instance ASARCO itself characterizes

its business in its protest (page 3) as “... the business of

mining, smelting, refining, manufacturing, buying and sell-

ing non-ferrous metals, metalliferous and other mineral

products.”

While in years past there was some dispute over the

point, for the years in question ASARCO itself has not

contested the concept that it is engaged in only one busi-

ness; it has not suggested that as a single company it en-

gages in two or more businesses and it is quite clear from

the evidence produced at the hearing that its business activ-

50a

ities are so inter-related as to defy measurement by sepa-

rate accounting, and to discredit the argument that its

business in Idaho consisting of a silver-copper mine, and

the exploration and development of ore bodies or mineral

deposits, can be separated from ASARCO’s worldwide

activities.

The auditor suggested the following as indicating that

the six unitary corporations are part of a unitary business

enterprise consisting of themselves and ASARC(Q: (a)

The wholly owned subsidiaries are engaged either in simi-

lar operations to ASARCO’s or are conducting manufac-

turing or sales operations for ASARCO. (b) ASARCO and

the unitary corporations have interlocking offivers and

directors which enables ASARCO to control the subsidi-

aries’ activities and major management decisions. (c) Sales

between ASARCO and the subsidiaries are numerous and

services are provided between the subsidiaries and parent

including management, accounting, budgeting, tax prepara-

tion, exploration, research, purchasing, sales and insur-

ance procurement. (d) All of the subsidiaries are entirely

owned by ASARCO. A brief description of the affiliated

unitary corporations is helpful:

(a) Federated Metals, Canada. Effectively, this subsi-

diary may be characterized as ASARCO’s method of doing

business in Canada. In Canada it conducts the same busi-

ness as the Federal Metals division of ASARCO carries

on in the United States. The I «derated Metals Division

of ASARCO specializes in processing or re-processing used

metals. It was originally created when ASARCO, during

the 1930's, purchased the Federated Metals Company and

converted it to a division of ASARCO. The division pur-

chases scrap and also uses metals from its own primary

plants when necessary; its main product is alloy metals

or usable lead products such as lead rules and sheet lead.

The Federated Metals Division of ASARCO does no busi-

ness in Canada except to sell to Federated Metals, Canada;

S5la

Federated Metals, Canada, in turn does no business in the

United States. ASARCO has provided capital to Federated

Metals; the amount is not known, but interest on the loan

from ASARCO to Federated Metals, Canada, varied be-

tween $140,000 to $200,000 per year.

(b) ASARCO Mercantile. ASARCO Mercantile business

consists primarily of purchasing machinery and supplies

for resale to other companies within the ASARCO group

for resale. It was characterized by the witness for taxpayer

as “a purchasing agent”. It was set up to “isolate several of

(the ASARCO subsidiaries) for Western Hemisphere

trade corporation status”. [See IRS (1954) Sees. 921 &

922] The prices at which such products would be bought

and sold clearly can be effectively controlled by ASARCO

management, and it seems to us that under any imaginable

test, ASARCO Mercantile is properly categorized as “uni-

tary” as it relates to ASARCO.

(c) Enthone, Inc. Enthone, Ine. produces metal finishing

chemicals for sale to the metal finishing industry. It was

acquired by ASARCO by purchase. Apparently its main

business consists of sales of metal plating materials

through relatively small commercial customers. Unlike

other ASARCO affiliates, Enthone has its own sales force

and has a more independent management (only the vice

president of Enthone is aiso an officer of ASARCO). There

are several members of the board of directors from ASAR-

CO, however. Enthone purchases a part of its supplies and

raw materials from ASARCO or other ASARCO affiliates;

taxpayer’s witness refused to characterize the purchases

as “substantial” but did not know the nature of the pur-

chases, which apparently are made from ASARCO’s Fed-

erated Metals Division. Apparently, if needed supplies are

available from ASARCO, they are purchased by Enthone

from ASARCO.

(d) International Metals Co. International Metals Com-

pany business consists of purchasing metals from ASARCO

52a

and resale of such metals overseas (generally in Europe).

In fact, from the record made before the Tax Commission,

if ASARCO Mercantile may fairly be characterized as a

“purchasing agent” then International Metal Company may

be fairly characterized as “a selling agent”. Its sole func-

tion and existence seems to depend upon its activities in

selling the ASARCO groups metal products overseas.

Goods are sold by International Metal Co. from ASARCO’s

stock; its purchase from ASARCO and resale is a “paper”

transaction and International Metal Co. serves as the con-

duit or selling agent for the ASARCO group’s products.

Finally, all of the officers of International Metal Co. are

also officers or employees of ASARCO, and function inter-

changeably in their duties, one minute serving ASARCO,

and the next International Metal Co.

(e) Lone Star Lead Construction Corp. Lone Star Lead

is primarily in the business of installing or servicing lead

lining in corrosive chemical tanks. Again, there apparently

is common management and needed materials (including

lead) are purchased from ASARCO.

(f) Northern Peru Mining. Northern Peru Mining con-

ducts its primary business in Peru and it consists of opera-

tion of mines yielding lead, copper, zinc and silver. North-

ern Peru Mining is 100 percent owned by ASARCO; ore

is treated in Peru in an initial treatment phase and re-

duced to a concentrate which contains approximately 25-30

percent copper. The ore during the period in question was

then shipped to an ASARCO plant in California for fur-

ther refining. The ore was processed at the California plant

and sold through the ASARCO marketing system. During

part of the time apparently all of the ore from the North-

ern Peru mine was sold to ASARCO; during the entire

period most of the ore was sold to ASARCO. Sales to per-

sons other than ASARCO occurred only because of a strike

at the ASARCO California plant.

53a

We believe the best statement of the definition or test

for a unitary business enterprise was that formulated in

Butler Brothers vs. McColgan, 111 P. 2d 334, and cited

with approval in Edison California Stores vs. McColgan,

183 P. 2d 16:

“ .. the unitary nature of appellant’s business is defi-

nitely established by the presence of the following cir-

cumstances: (1) unity of ownership; (2) unity of op-

eration as evidenced by central purchasing, advertis-

ing, accounting and management divisions; and (3)

unity of use in its centralized executive force and gen-

eral system of operation.”

In the present instance we find each of the six corpora-

tions properly fall within the classification as an integral

part of a unitary business enterprise, and they were prop-

erly combined by the auditor.

Finally, we must consider taxpayer's objection to the

treatment of the following classes of income as business

income :

1. Dividends

2. Interest

3. Patent Royalties

4. Gain from gales of capital assets

Very littie was said during the hearing, or in briefs sub-

mitted hy taxpayer or the staff, concerning items other

than dividends. We believe that the management of invest-

ment and working capital is clearly an integral or regular

part of this taxpayer’s trade or business, and as the re-

turns indicate, taxpayer received very substantiai amounts

of interest income (part of it coming from subsidiary cor-

porations). While its direct interest income exceeded its

direct income expense, we think on the record made before

us that interest received by this taxpayer was received in

54a

the regular course of its trade or business and arose from

transactions and activities in the regular course of such

trade or business.

The record is also unclear concerning the source and na-

ture of taxpayer’s patent royalty income.

We have already outlined the activities and business, and

its relationship to that of ASARCO, carried on by the six

unitary corporations combined with ASARCO. We would

note that even if such companies were not combined with

ASARCO, they are clearly inter-related with ASARCO,

and dividends paid ASARCO by such companies would

clearly be business income. We think it is helpful to outline

the nature of the businesses conducted by the remaining

corporations paying dividends to ASARCO.

(a) ASARCO Australia is a 100 percent owned subsidi-

ary active in exploring minerals in Australia, and not op-

erating within the United States.

(bh) ASARCO Exploration Company is 100 percent

owned and involved in mineral exploration activities, pri-

marily outside the United States in Canada and other sec-

tions of the Western Hemisphere.

(c) ASARCO Developments is a 100 percent owned sub-

sidiary involved in explorations in New Zealand.

(d) Compania American Smelting, S. A. is a 100 percent

owned Chilian company whose activities are to buy ore in

Chile. The purchases are made for ASARCO itself. Its

character was described as that of a purchasing office for

ASARCO, its profits are determined by the difference be-

tween the price it pays and the price at which it sells to

ASARCO, That price in turn can be controlled by

ASARCO, who owns the company and has the power to

appoint officers and management.

(e) Lake Asbestos of Quebec, Ltd. is a 100 percent

owned subsidiary involved in mining and sale of asbestos.

55a

ASARCO International is a selling agent for Lake Asbestos

and is a 100 percent owned subsidiary. Apparently its

primary sales are in Europe; it is unclear whether they

sell elsewhere.

(f) Southern Peru Copper is a 51.5 percent owned cor-

poration. ASARCO has the power to appoint six of thir-

teen directors in Southern Peru Copper. Six of the remain-

ing seven directors are appointed by other shareholders in

the corporation and the thirteenth director apparently is

chosen by the twelve appointed by ASARCO and other

shareholders. ASARCO is the largest single shareholder;

it indicates that the remaining three shareholders, owning

the remainder of the stock, refuse to participate in the

company unless assured that they would have a way to

assure that management would not be completely domi-

nated by ASARCO. Each company is entitled to purchase

output from the mine in proportion to its stock ownership.

ASARCO, for example, would be entitled to purchase 51.5

percent of available copper for sale. The product of the

mine is “blister copper”, which is copper that has been

smelted and is approximately 97 percent pure. Blister cop-

per, however, is not marketable, and must be refined before

it can be commercially marketed. This refining, in the case

of copper sold to ASARCO, is done in the United States at

ASARCO refineries. ASARCO originally owned the min-

ing property, and required approximately 235 million dol-

lars to put it into production. ASARCO and the remaining

three shareholders obtained loans from the Export-Import

Bank and outside financing to develop the mine. ASARCO

hopes that ownership or partial ownership of Southern

Peru Copper Corporation will assure it of a long-term sup-

ply of copper, since physically there is a long-term supply

of copper. The supply is dependent upon the political cli-

mate in Peru in that the mine could be ex-propriated by

the Peruvian government.

56a

(g) M.I.M., which apparently is a holding company for

Mount Isa Mines, is a 52.7 percent controlled subsidiary.

The company owns a large mine in Australia which pro-

duces gold, silver, lead, copper and zine. The company owns

smelters and a refinery in Australia and a substantial part

of their product is sold in Japan and Europe. Sales to

ASARCO are extremely limited; apparently they amount

to no more than a few thousand dollars per year.

(h) Neptune Mining is a 51.8 percent owned subsidiary.

During the years in question the company was involved in

gold mining in Nicaragua; subsequent to those years the

gold mining had been discontinued but lead and copper is

being mined. The output of Neptune Gold mining is in the

form of concentrates which are sold to ASARCO and re-

fined and smelted at ASARCO’s plants.

(i) ASARCO Mexicana, S. A. is a 49 percent owned

subsidiary and apparently conducts the same business in

Mexico that ASARCO carries on in the United States. In

the words of the witness for ASARCO, the two businesses

are “parallel”. The remaining 51 percent of the stock ‘in

the company is owned by a group of Mexican citizens and

the remaining ownership is scattered so that ASARCO is

the largest single stockholder in the company. Products

from ASARCO Mexicana, S. A. are sold to ASARCO.

(j) Mexicana de Cobra S. A. owns the mineral lands

upon which ASARCO Mexicana operates.

In addition to the foregoing inter-relationships, ASAR-

CO itself provides services to its subsidiaries. Subsidiaries

are subjected to a charge from ASARCO for management,

which is apportioned on the basis of direct costs. The wit-

ness from ASARCO was unable to indicate how these costs

were determined or apportioned. ASARCO in past times

apparently has provided substantial financing to the sub-

sidiaries, or some of them. During the period, loans were

made to Federated Metals. In general, ASARCO pays offi-

57a

cers’ salaries for all companies; the officers in fact are em-

ployees of ASARCO. Generally there is a common em-

ployee retirement plan; however, Northern Peru’s is sep-

arate so also is that of Enthone and Federated Metals.

ASARCO Mercantile had no employees of its own nor did

International Metals.

ASARCO has a single required source for insurance; it

has an arrangement to purchase insurance through a broker

located at or near its headquarters building, and receives

favorable rates because of its volume of purchase of insur-

ance for itself and its subsidiaries. ASARCO maintains

financial records for most of the subsidiaries except North-

ern Peru, Lake Asbestos and possibly Enthone. However,

even these companies receive technical advice and some

accounting services, and services in connection with pre-

paring consolidated financial records and tax returns, from

ASARCO itself.

ASARCO provides legal services for all of the subsidi-

aries.

Finally, and perhaps most important for an enterprise

active in the mining and development of metals, ASARCO

provides exploration and development services for the

subsidiaries through its own exploration and development

department, or through the subsidiary exploration and de-

velopment companies,

Taxpayer strenuously argues that all dealings between

the various companies were conducted “at arm's length”

(which is an extremely tenuous argument since in many

instances one officer was dealing for both of the “negotiat-

ing” parties as the agent of both companies) or at least

such vransactions were conducted at fair or reasonable

prices. The argument mixes the very essence of formulary

apportionment, which is that where there are integrated,

interdependent steps in the economic process carried on by

a business enterprise; there is no logical or viable method

58a

for accurately separating the profit attributable to one

step in the economic process from other steps. Essentially,

formulary apportionment is necessary because inherent

difficulties or impossibilities are present in seeking to di-

vide the profits of a company like ASARCO where produc-

ing, manufacturing, and marketing are conducted by the

same company but take place in different states. The argu-

ment for taxpayer is not strengthened by considering

whether each of the separate manufacturing processes or

steps could be conducted entirely separate from the remain-

ing steps; if this took place, the Commission would not be

attempting to measure a tax due from ASARCO and the

unitary corporations with the strengths and weaknesses of

an integrated operation that may commence in Peru and

end in sale of products in Europe; the Commission would

be faced with an entirely different taxpayer. We conclude

that any attempt to separate out the profits of integrated

steps of a business enterprise is unrealistic and futile. The

problem is not merely one of measurement of what a com-

ponent part might make if it were operated as a separate

business; it is measurement of an integrated business

enterprise.

The final major issue presented is whether income re-

ceived by taxpayer in the form of dividends is properly

apportioned as business income on the basis of the factors

prescribed by § 63-3027, Idaho Code, or whether such in-

come should be allocated to taxpayer’s commercial domicile

or sone other state in its entirety.

The controversy seems to hinge on two questions:

1. Under § 63-3027, Idaho Code, is the income properly

classified as “business income” or “nonbusiness income”.

2. If the income in question is properly classified as

“business income” does apportionment of such income of-

fend the United States Constitution.

59a

We find that the dividend income in question constitutes

business income within the meaning of § 63-3027(a)(1),

Idaho Code. “Business income” is defined as:

“... income arising from transactions and activity in

the regular course of taxpayers’ regular business and

includes income from the acquisition, management, or

disposition of tangible and intangible property when

such acquisition, management, or disposition consti-

tutes integral or necessary parts of the taxpayers’ busi-

ness operations. Gains or losses and dividend and in-

terest income from stock and securities of any foreign

or domestic corporation shall be presumed to be in-

come from intangible property, the acquisition, man-

agement, or disposition of which constitute an integral

part of the taxpayers’ trade or business; such pre-

sumption may only be overcome by clear and convine-

ing evidence to the contrary.”

It seems clear that § 63-3027, Idaho Code, does not pro-

vide for automatic allocation to commercial domicile of all

dividends, and provides only for allocation of dividends

when they constitute “nonbusiness income”.

“Kents and royalties from real or tangible personal

property, capital gains, interest, dividends, or patent

or copyright royalties, to the extent that they consti-

tute nonbusiness income, shall be allocated . . .” § 63-

3027(d), Idaho Code.

(For the year 1968, the last sentence of § 63-3027(a) (1)

reads :

“(ains or losses and dividend and interest income from

stock and securities of any foreign or domestic cor-

poration in which the taxpayer owns or has the right

to acquire, directly or indirectly, more than five per

cent (5%) of the voting stock shall be presumed to be

income from intangible property, the acquisition, man-

60a

agement, or disposition of which constitute an integral

part of the taxpayers’ trade or business, such pre-

sumption may only be overcome by clear and convinc-

ing evidence to the contrary.”

The change does not appear to be material in the present

controversy since in all cases taxpayer owned 5 percent

or more of the voting stock of the subsidiaries in question.)

Taxpayer has not shown by clear and convincing evidence

that the acquisition, management, or disposition cf the

dividend paying subsidiaries in question does not consti-

tute an integral part of its trade or business, and we find

that the dividend income was business income.

The legislature has provided that as to income from

dividends or capital gains on stocks, such income is pre-

sumed to be business income unless such presumption is

overcome with clear and convincing evidence to the con-

trary. We do not believe by such provision the legislature

intended to change the general principle that in situations

such as the present the taxpayer must carry the burden of

proof. It cannot be inferred that since the taxpayer must

establish dividend income as nonbusiness income by clear

and convincing evidence, that the Commission establish

that other categories of income are business income. We

think instead that the legislature only meant to provide

a different standard of proof for the taxpayer in the case

of dividend income and capital gains on stock.

Passing to the second question we see presented by this

controversy, we do not believe that treating the income in

question as business income offends the United States

Constitution. If dividend income is to be taxed, there would

seem to be two alternatives. The income can be treated as

being earned at the “commercial domicile” of the corpora-

tion. The effect of such treatment is to arbitrarily assign

to the state of commercial domicile one of the largest cate-

gories of income received by a large multistate taxpayer.

6la

The concept of taxing all dividend income at the tax-

payer’s commercial domicile is a remnant of a fiction de-

veloped at an earlier date that the “situs” of an intangible

was at a corporation’s commercial domicile, which was very

emphatically rejected by the Idaho Supreme Court in John

Hancock Mutual Life Insurance Co. vs. Neil, 79 Idaho

385; and in Futura Corporation vs, State Tax Commission,

92 Idaho 288. The Supreme Court of the United States

itself has not given support in its more recent decisions to

the automatic assignment of intangible income to a tax-

payer’s commercial domicile, and we know of no case de-

cided by the United States Supreme Court holding that

income from intangibles must be assigned to the taxpayer’s

commercial! domicile and cannot be assigned to other states.

If a taxpayer has 10 percent of its assets, and its commer-

cial dumicile in state A, and 90 percent of its assets in state

B, it is at least as reasonable to assume that 90 percent of

its intangibles should be assigned to state B and 10 percent

of its intangibles should be assigned to state A, as it is to

automatically assume that all intangibles are held in state

A. In fact, the key characteristic of an intangible is that

is [sic] has no physical existence and has no physical

location.

Whatever may be proper in the case of a taxpayer con-

ducting a separate and distinct business operation involv-

ing investments and receipt of dividends, we think that

where intangibles, or an investment in subsidiaries, is used

as an integral and necessary part of the conduct of a tax-

payer’s trade or business the income is business income.

Finally, taxpayer contends that because the audit was

in part conducted by the Multistate Tax Commission the

proposed assessment is therefore invalid. Taxpayer does

not further expound upon this principle in its brief and we

are unable to follow the argument. We suppose the consti-

tutionality is questioned because it is a compact between

two or more states and because as might seem to be re-

quired by Article 1, Section 3 of the United States Con-

62a

stitution, consent by Congress has not been given. The

argument has not been briefed by taxpayer or the staff,

nor are we convinced that this Commission is the proper

tribunal to determine the constitutionality of statutes duly

enacted by the state legislature. However, we need not

face that question; even assuming the compact be uncon-

stitutional, it would by no means follow that the Commis-

sion could not utilize the fruits of an audit conducted by

Multistate Tax Commission personnel,

Wuererore, the State Tax Commission hereby Orpers

that the Notice of Deficiency Determination dated Septem-

ber 14, 1971, and amended March 27, 1973, as herein modi-

fied, and which modification is shown on Exhibit “A” at-

tached hereto, be hereby Approvep, Arrmmep and Mave

Fina.

Daten this 2nd day of July, 1974.

Ipano State Tax Commission

/8/ Don G. LoveLanp

Chairman

Orig: File .

eerr: Taxpayer (R.R. #11,551)

(Certificate Omitted in Printing)

63a

APPENDIX B

IN THE SUPREME COURT OF THE STATE OF IDAHO

No. 12198

AMERICAN SMELTING AND Rerinina Company,

Plaintiff-Respondent,

Vv.

Ipano State Tax Commission,

Defendant-Appellant.

Justice Bakes announced the decision in this cause March

12, 1969, to the effect that the judgment of the District

Court of the Fourth Judicial District of the State of Idaho,

Ada County, is reversed and remanded for further proceed-

ings as set forth in the opinion.

Ir Is Now Tuererore So Orperep.

I, R. Ui. Young, Clerk of the Supreme Court of the State

of Idaho, do hereby certify that the attached and foregoing

is a true and correct copy of the opinion filed in the above

entitled cause April 3, 1979, and now of record in my office.

Witness My hand and the seal of this Court April 3,

1979.

R. H. Young, Clerk

/s/ By: Jupy E. Cizmisn

Deputy Clerk

64a

IN THE SUPREME COURT OF THE STATE OF IDAHO

No. 12198

AMERICAN SMELTING AND REFINING ComPANY, Plaintiff-

Respondent,

Ve

IDAHO State TAx Commission, Defendant-Appellant.

REMITTITUR

The Court, by per curiam opinion, on reargument on re-

mand from the United States Supreme Court, announced the

decision in this cause March 4, 1981, reinstating the Court’s

prior opinion, filed March 12, 1979, to the effect that the

judgment of the District Court of the Fourth Judicial District

of the State of Idaho, Ada County, is reversed and remanded

as set forth in the opinion.

It Is Now THEREFORE SO ORDERED.

1, KR. H. Young, Clerk of the Supreme Court of the State of Idaho, do hereby

certify that the above is a true and correct copy of the judgment entered in the

above entitled cause March 26, 1981, and now of record in my office.

WITNESS my hand and the Seal of this Court March 26, 1981.

R.H. Youno Clerk

65a

APPENDIX C

IN THE SUPREME COURT OF THE STATE OF IDAHO

Case No. 12198

Notice Of Appeal To The Supreme Court

Of The United States

AMERICAN SMELTING & REFINING Co., Appellant,

v.

IDAHO STATE TAX COMMISSION, Appelle.

Notice Is Heresy given that American Smelting and

Refining Company (ASARCO) the above-named appellant,

hereby appeals to the Supreme Court of the United States

from the final judgment of the Supreme Court of the State of

Idaho entered on March 4, 1981, reinstating the prior opinion

and order of that Court after remand for further

consideration in light of the decision of the United States

Court in Mobil Oil.

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

DaTeD this 18th day of May, 1981.

PHitip E. PetTerson, P.A.

Philip E. Peterson, P.A.

318 Fifth Street

Lewiston, Idaho 83501

LEE, TOOMEY & KENT

George W. Beatty and

William L. Goldman

Suite 812

1200 - 18th Street NW

Filed May 18, 1981 Washington, D.C. 20036

1, R. H. Young, Clerk of the Supreme Counsel for Appellant

Court of the State of Idaho, do hereby

certify that the above is a true and

correct copy of the Notice of Appeal

entered in the above entitled cause and

now on record in my office.

WITNESS my hand and the Seal of this

Court 5/18/81

R.H. Youn Clerk

By: Mariyn Bourne Deputy

66a

IN THE SUPRLME COURT OF THE STATE OF IDAHO

Case No. 12198

Notice Of Appeal To The Supreme Court

Of The United States

AMERICAN SMELTING & REFINING Co., Appellant,

v.

IDAHO STATE TAX COMMISSION, Appelle.

Notice Is HEeReBy given that American Smelting and

Refining Company (ASARCO) the above-named appellant,

hereby appeals to the Supreme Court of the United States

from the final judgment of the Supreme Court of the State of

Idaho entered on March 4, 1981, reinstating the prior opinion

and order of that Court after remand for further considera-

tion in light of the decision of the United States Supreme

Court in Mobil Oil.

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

DaTED this 18th day of May, 1981.

Poitip E. Peterson, P.A,

Philip E. Peterson, P.A.

318 Fifth Street

Lewiston, Idaho 83501

Lee, TOOMEY & KENT

George W. Beatty and

William L. Goldman

Filed May 18, 1981 Suite 812

isl ot titi 1200 - 18th Street NW

County of Ada Washington, D.C. 20036

1, John Bastida, Clerk of the ©

District ‘Court of the Fourth Judiciaa COl"Sel for Appellant

District of the State of Idaho, in and for

the County of Ada, do hereby certify

that the foregoing is a true and correct

copy of the copy on file in this office.

In witness whereof, | have hereunto

set my hand and affixed my official seal

this 18 day of May, 1981.

JOHN BASTIDA,

Clerk of the District Court

By: Bonnie E. Button Deputy

67a

Idaho Code § 63-3027

63-3027. ComputTina Taxanie Income or Nonresipent

Persons AND ANY Corporarions.—The Idaho taxable in-

come of a nonresident person with business situs in this

state or any corporation with a business situs in this state

shall be computed and taxed in accordance with the rules

set forth in this section:

(a) As used in this section, unless the context other-

wise requires:

(1) “Business income” means income arising from

transactions and activity in the regular course of the

taxpayers’ trade or business and includes income from

the acquisition, management, or disposition of tangi-

ble and intangible property when such acquisition,

management, or disposition constitute integral or nec-

essary parts of the taxpayers’ trade or business opera-

tions. Gains or losses and dividend and interest income

from stock and securities of any foreign or domestic

corporation [in which the taxpayer owns or has the

right to acquire, directly or indirectly, more than five

per cent (5%) of the voting stock] shall be presumed

to be income from intangible property, the acquisition,

management, or disposition of which constitute an in-

tegral part of the taxpayers’ trade or business; such

presumption may only be overcome by clear and con-

vincing evidence to the contrary.

(2) “Commercial domicile” means the principal place

from which the trade or business of the taxpayer is

directed or managed.

(3) “Compensation” means wages, salaries, commis-

sions and any other form of remuneration paid to em-

ployees for personal services.

68a

(4) “Nonbusiness income” means all income other than

business income.

(5) “Sales” means all gross receipts of the taxpayer

not allocated under subsections (d) through (h) of this

section.

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

District of Columbia, the Commonwealth of Puerto

Rico, any territory or possession of the United States,

and any foreign country or political subdivision there-

of.

(b) Any taxpayer having income from business ac-

tivity which is taxable both within and without this

state shall allocate and apportion such net income as

provided in this section.

(c) For purposes of allocation and apportionment

of income under this section, a taxpayer is taxable in

another state if:

(1) In that state he is subject lo a net income tax,

a franchise tax measured by net income, a fran-

chise tax for the privilege of doing business, or a

corporate stock tax, or

(2) that state has jurisdiction to subject the tax-

payer to a net income tax regardless of whether, in

fact, the state does or does not.

(d) Rents and royalties from real or tangible per-

sonal property, capital gains interest, dividends, or

patent or copyright royalties, to the extent that they

constitute nonbusiness income, shall be allocated as

provided in subsection (e) through (h) of this section.

(e)(1) Net rents and royalties from real property

located in this state are allocable to this state.

(2) Net rents and royalties from tangible per-

sonal property are allocable to this state:

69a

(i) If and to the extent that the property is

utilized in this state, or

(ii) in their entirety if the taxpayer's com-

mercial domicile is in this state and the tax-

payer is not organized under the laws of or

taxable in the state in which the property is

utilized.

(3) The extent of utilization of tangible personal

property in a state is determined by multiply-

ing the rents and royalties by a fraction, the

numerator of which is the number of days of

physical location of the property in the state dur-

ing the rental or royalty period in the taxable

year and the denominator of which is the number

of days of physical location of the property every-

where during all rental or royalty periods in the

taxable year. If the physical location of the prop-

erty during the rental or royalty period is un-

known or unascertainable by the taxpayer, tangible

personal property is utilized in the state in which

the property was located at the time the rental or

royalty payer obtained possession.

(f)(1) Capital gains and losses from sales of real

property located in this state are allocable to this

state.

(2) Capital gains and losses from sales of tangi-

ble personal property are allocable to this state if:

(i) the property had a situs in this state at

the time of the sale, or

(ii) the taxpayer's commercial domicile is in

this state and the taxpayer is not taxable

in the state in which the property had a situs.

(3) Capital gains and losses from sales of intangi-

ble personal property are allocable to this state if

70a

the taxpayer’s commercial domicile is in this state,

unless such gains and losses constitute business in-

come as defined in this section.

(g) Interest and dividends are allocable to this state

if the taxpayer’s commercial domicile is in this state

unless such interest or dividends constitute business

income as defined in this section,

(h)(1) Patent and copyright royalties are allocable

to this state:

(i) if and to the extent that the patent or

copyright is utilized by the payer in this

state, or

(ii) if and to the extent that the patent or

copyright is utilized by the payer in a state in

which the taxpayer is not taxable and the tax-

payer’s commercial domicile is in this state.

(2) A patent is utilized in a state to the extent

that it is employed in production, fabrication, man-

ufacturing, or other processing in the state or

to the extent that a patent product is produced in

the state. If the basis of receipts from patent roy-

alties does not permit allocation to states or if the

accounting procedures do not reflect states of

utilization, the patent is utilized in the state in

which the taxpayer’s commercial domicile is }o-

cated.

(3) A copyright is utilized in a state to the extent

that printing or other publication originates in the

state. If the basis of receipts from copyright roy-

alties does not permit allocation to states or if the

accounting procedures do not reflect states of utili-

zation, the copyright is utilized in the state in

which the taxpayer's commercial domicile is lo-

cated.

Tila

(i) All business income shall be apportioned to this

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

erator of which is the property factor plus the payroll

factor plus the sales factor, and the denominator of

which is three (3).

(j) The property factor is a fraction, the numerator

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

and tangible personal property owned or rented and

used in this state during the tax period and the de-

nominator of which is the average value of all the tax-

payer’s real and tangible personal property owned or

rented and used during the tax period.

(k) Property owned by the taxpayer is valued at its

original cost. Property rented by the taxpayer is val-

ued at eight (8) times the net annual rental rate. Net

annual rental rate is the annual rental rate paid by the

taxpayer less any annual rental rate received by the

taxpayer from subrentals.

(1) The average value of property shall be deter-

mined by averaging the vaiues at the beginning and

ending of the tax period, but the [tax collector] state

tax commission may require the averaging of monthly

values during the tax period if reasonably required to

reflect properly the average value of the taxpayer’s

property.

(m) The psyroll factor is a fraction, the numerator

of which is the total amount paid in this state during

the tax period by the taxpayer for compensation, and

the denominator of which is the total compensation

paid everywhere during the tax period.

(n) Compensation is paid in this state if:

(1) the individual’s service is performed entirely

within the state; or

72a

(2) the individual’s service 1s performed both

within and without the state, but the service per-

formed without the state is incidental to the in-

dividual’s service within the state; or

(3) some of the service is performed in the state

and

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

base of operations, the place from which the

service is directed or controlled is in the state,

or

(ii) the base of operations or the place from

which the service is directed or controlled is

not in any state in which some part of the

service is performed, but the individual’s resi-

dence is in this state.

(o) The sales factor is a fraction, the numerator of

which is the total sales of the taxpayer in this state

during the tax period, and the denominator of which is

the total sales of the taxpayer everywhere during the

tax period.

(p) Sales of tangible personal property are in this

state if:

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

chaser other than the United States government,

within this state regardless of the f.o.b. point or

other conditions of the sale, or

(2) the property is shipped from an office, store,

warehouse, factory, or other place of storage in

this state and

(i) the purchaser is the United States govern-

ment or

(ii) the taxpayer is not taxable in the state of

the purchaser.

73a

(q) Sales, other than sales of tangible property,

are in this state, if:

(1) the income-producing activity is per-

formed in this state; or (2) the income-pro-

ducing activity is performed both in and out-

side this state and a greater proportion of the

income-producing activity is performed in this

state than in any other state, based on costs

of performance.

(r) Uf the allocation and apportionment provisions

of this section do not fairly represent the extent of the

taxpayer’s business activity in this state, the taxpayer

may petition for or the [tax collector] state tac com-

mission may require, in respect to all or any part of

the taxpayer’s business activity, if reasonable:

(1) separate accounting, provided that only that

portion of general expenses clearly identifiable

with Idaho business operations shall be allowed as

a deduction;

(2) the exclusion of any one or more of the fac-

tors;

(3) the inclusion of one or more additional factors

which will fairly represent the taxpayer’s business

activity in this state; or

(4) the employment of any other method to effee-

tuate an equitable allocation and apportionment

of the taxpayer’s income.

(s) For purposes of this section a parent and sub-

sidiary corporation may, when necessary to accurately

reflect income, be considered a single corporation.

(t) In computing the taxable income of a part-year

or nonresident individual, trust or estate, the [optional

standard deduction as defined in section 141 of] stand-

74a

ard deductions as allowed by the Internal Revenue

Code, if applicable, the exemptions as defined in sec-

tion 151 of the Internal Revenue Code, and the Fed-

eral Income Tax deduction shall all be allowed in the

proportion that the adjusted gross income of the tax-

payer from Idaho sources bears to the total adjusted

gross income from all sources before any deductions

therefrom. The adjusted gross income, as used in this

subsection, shall mean adjusted gross income as de-

fined in section 62 of the Internal Revenue Code with

adjustinents for necessary additions and subtractions

of income under this act.

Section 10. That Section 63-3031, Idaho Code, be,

and the same is hereby amended to read as follows:

(Bracketed material deleted in 1969 pursuant to Section

9, Chapter 19, Session Laws of 1969.)

75a

DIVIDENDS

1968 1969

Federated Metals

of Canada ~ None $ None

ASARKCO o 12,5 15,000

Mercantile 4

Enthone, Ine. 4 340,000 400,000

Int’l. Ine. > 50,000 200,000

Lone Star Lead 80,000 80,000

No. Peru

Mining Corp. 1,750,000 2,450,000

Compania American

Smelting 15,687 26,385

Lake Asbestos of

Quebec, Ltd. 1,120,670 2,525,000

ASARCO Int’l. Corp. 70,000 80,000

So. Peru Copper

Corp. 25,787,904 32,234,880

M.I.M. Holdings, Ltd. 9,661,070 20,466,130

ASARCO Mexicana,

S.A. 1,882,918 1,882,918

General Cable 5,818,308 5,333,449

Revere Copper 2,814,444 2,814,444

Heela Mining 91,729 46,242

Kennecott Copper

Corp. 243,908 285,490

Phelps Dodge 269,850 300,690

Cia Minera de San

Asidro y Aneyas,

S.A. 50,557 —0—

Cia. Metalurgia Mex. — 337,500 300,000

Japan Metal Finishing 8,454 6,081

Zine Ind. S.A. 131,527 40,993

Pernix Enthone, S.A, 24,126

Apache Power 5,600 7,600

TOTALS

2,475,000

135,000

18,132,120

33,647,396

1,882,918

2,100,763

2,345,370

11,561

283,280

323,820

wells

330,000

11,383

86,359

8,000

$50,542,626° $69,519,428° $64,762,970°

* Total as shown in Federal Return for ASARCO

76a

INTEREST

1968

U.S. Government

Securities

United Park City Notes

EKisma Notes (sale of

ASARCO Mexicana

stock)

State and Local Bonds

Federated Metals of

Canada, Ltd.

Revere Copper and

Brass 544% con-

vertible debentures

N.Y. & Honduras Mining

Co. Notes

Bank Interest (fixed

deposits)

U.S. Reduction Corp.

Notes

Sunshine Mining Com-

pany Notes

Clayton Silver Mines

Notes

Interest in connection

with General Cable

Sale

Neptune Gold Mining

Note

Moran Notes (sale of

Los Angeles plant)

Tax Refunds

Other Marketable

Securities *

Other Interest Income

$1,182,989

12,000

506,000

330,489

1,251,965

24,559

63,306

887,565

24,094

1970

—

1969

$1,749,007 $2,239,199

12,000 12,000

363,000 242,000

672,635 111,023

132,092 260,854

1,251,965 1,251,965

68,861 132,690

20,277

25,375

1,051,004

4,673

56,250

17,579 329,296

1,590,027 1,191,495

29,293 111,900

TOTALS $4,282,917

$5,906,736 $7,019,724

See footnote on page 73

77a

CAPITAL GAINS

1968 1969 1970

Sale of M.LM. Stock $4,487,203 $2,230,370 ¢

Sale of Cia Minera de

San Asidro y Aneyas

stock (645,817)

Sale of Heela Stock 3,753,251 141,098

Sale of U.S. Bonds (in-

cludes Federal Land

Bank bonds) 118,906 81,406

Sale of State & Local

Bonds and notes (1,723) 113,950

Sale of Land, Buildings

& Equipment** 16,232 98,089 51,952

Sale of U.S. Treasury

Bonds 302,187

Sale of Connecticut

244% Bonds 16,844

Sale of General Cable

Stock 45,482,303

Sale of Zine Industrial,

S.A. 406,207

TOTALS $7,728,052* $2,523,815" $46,400,591°

* This is also reported on the ASARCO federal return.

** These represent Seetion 1245 recapture sales of property

used in the business and are reported as ordinary in-

come,

* Other Marketable Securities:

Bankers Acceptances — $ 135,568 $ 360,833 $ 98,952

Time Certificates of

Deposit 83,007 61,076 347,376

Commercial Paper Notes 668,990 1,168,118 746,402

$ 887,565 $1,590,027 $1,192,760

Less amortization (time

certificate deposits) (1,265)

TOTAL ABOVE = $ 887,565 $1,590,027 $1,191,495

78a

APPENDIX F

Appendix F to Jurisdictional Statement in Mobil Oil Corp.

v. Commissioner of Taxes of Vermont, 445 U.S. 425, 100

S.Ct. 1223 (1980)

Appendix F

ALLOCATION OR APPORTIONMENT OF

DIVIDENDS INCLUDED IN THE TAX BASE*

Non-Business

Dividends Allocated

All Taxable to Commercial

Dividends Allocated Domicile and All Taxable

to Commerical Business Dividends Dividends

State’ Domicile _ eS Apportioned a Apportioned

Alabama

Alaska

Arizona X

Arkansas

California X

Colorado

Delaware X

District

of Columbia

Hawaii

Idaho

Illinois

x K KK

x AK

* This table includes only jurisdictions which include foreign

source dividends, in part or in whole, in the tax base. Georgia,

Florida and Ohio have been omitted because foreign source

dividends are not taxable (Ga. Code §92-3102, CCH 10-512,

11-512), or they are taxable only if the payor transacts a substantial

portion of its business, or has a substantial portion of its assets in

the United States (Fla. Stat. §220.13, CCH 10-310), or has physical

assets located in the State (Ohio Rev. Code Ann. §5733, CCH

10-309, 336, 378, 11-425).

' Ala. Code Tit. 40, §40-18-34, CCH 10-535, 15-090; Alaska Stat.

§§43.19.010, 43.20.065, CCH 12-417, 418; Ariz. Rev. Stat.

§43-135(g), CCH 12-405; Ark Stat. Ann. §§84-2055(a), 2058, 2061,

2063, CCH 11-537, 572; Cal. Rev. & Tax. Code, §25126, CCH

79a

Non-Business

Dividends Allocated

All Taxable to Commercial

Dividends Allocated Domicile and All Taxable

to Commerical Business Dividends —_ Dividends

State’ ues _ Domicile ___ Apportioned Apportioned

Indiana X

Kansas X

Louisiana X

Maine Xx

Maryland X

Massachusetts X

Minnesota X

Mississippi X

Montana X

Nebraska xX

12-428; Colo. Rev. Stat. §24-60-1301, CCH 12-538; Del. Code Tit.

30, §1903(b)(6), CCH 10-840; D.C. Code §47-1580(a), CCH 12-405,

413; Haw. Rev. Stat. §§235-22, 27, 29, CCH 12-530, 540; Idaho

Code §63-3027(g), (i), CCH 12-490, 510; Ill. Rev. Stat. Ch. 20,

§301, 304, CCH 90-907, 916; Ind. Code Ann. §6-3-2-2, CCH

12-405, 415, 448; Kan. Stat. §§79-3274, 3277, 3279, CCH 12-478,

490; La. Rev. Stat. Ann. §243, CCH 12-411; Me. Rev. Stat. Tit. 36,

§§5211(6), (8), CCH 12-460, 465; Md. Ann. Code Art. 81, §316(c),

CCH 12-410, 420; Mass. Gen. Laws Ann. Ch. 63, §38(a) (1), (c)

CCH 10-324, 330; Minn. Stat. §290.17, CCH 12-407; Miss. Code

Ann. §27-7-23(1)(a); Miss. Inc. Tax Reg. §1.27-7-23(1), CCH

12-405, 407, 435; Mont. Rev. Codes Ann. §84-1503, CCH 11-501(c),

(f), (h); Neb. Rev. Stat. §77-2735(4), 2741, 2743, CCH 12-425, 445,

455; N.H. Rev. Stat. Ann. §77-A:3, CCH 15-350, 355; N.J. Rev.

Stat. §54:10A-6, CCH 5-805, 810; N.M. Stat. Ann. §§72-15A-20,

23, CCH 12-425, 455, 465; N.C. Gen Stat. §105-130.4(c), (f), (i),

CCH 10-805, 820; N.D. Cent. Code §57-38.1, CCH 12-454, 460,

464; Okla. Stat. Tit. 68, §2358A, CCH 12-425; Or. Rev. Stat.

§314.625, 640, 650, CCH 12-414, 418, 422; R.I. Gen. Laws

§44-11-14, CCH 10-810; S.C. Code §12-7-1120, CCH 12-435; Tenn.

Code Ann. §67-2709, 2712, 2714, CCH 12-419, 425, 429; Utah

Code Ann. §59-13-81, 84, 86, CCH 11-515, 530, 540; Vt. Stat. Ann.

Tit. 32, §5833(a), CCH 12-410; Wis. Stat. Ann. §71.07(1m) (2),

CCH 12-404(a), 409. All CCH references are to the relevant

paragraphs in the Commerce Clearing House, Inc. State Tax

Reporter Service.

80a

Non-Business

Dividends Allocated

All Taxable to Commercial

Dividends Allocated Domicile and All Taxable

to Commerical Business Dividends Dividends

State' Domicile Apportioned Apportioned

New Hampshire X

New Jersey X

New Mexico xX

North Carolina X

North Dakota X

Oklahoma X

Oregon X

Rhode Island xX

South Carolina X

Tennessee X

Utah X

Vermont A

Wisconsin xX

Total’ 7 19 8

> Four States that tax foreign source dividends have been omitted

from the table because their methods of allocation or apportion-

ment do not fit into the scheme used by most States.

Connecticut: Allocates dividends from subsidiaries by reference

to the ratio of the payor’s business done in the State; non-

subsidiary dividends are apportioned if they constitute an in-

tegral part of the recipient’s regular business operations (Conn.

Gen. Stat. §12-218, CCH 10-815, 825).

lowa: There appears to be a conflict between the statute and

the rules as to the extent to which dividends are allocated or

apportioned (lowa Code §422.33, CCH 12-520; lowa Rule

54.2(1), CCH 12-522).

New York: Includes in the tax base only non-subsidiary

dividends (to the extent of 50%), which it allocates in the ratio

of the payor’s New York apportionment percentages (N.Y. Tax

Law §210, CCH 5-829—841, 9-581).

Virginia: Dividends of non-subsidiaries are allocated to the

State if it is the recipient’s commercial domicile; dividends paid

by subsidiaries are apportioned (Va. Code §58-151.040,

CCH 12-445).