In the Matter of the income Tax Appeal of Pioneer Bag Company of Kansas, Inc., Docket No. 1582-82-DT
Corporate Income Tax
Is the Pioneer Bag Company of Kansas and its parent corporation engaged in a unitary business
BEFORE THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS
IN THE MATTER OF THE INCOME
TAX APPEAL OF PIONEER BAG
COMPANY OF KANSAS, INC., FOR
THE FISCAL YEARS FEBRUARY 26,
1978 THROUGH FEBRUARY 24,
Docket No. 1582-82-DT
Now, on this 4th day of August, 1982, the above captioned matter comes on for consideration and decision by the Board of Tax Appeals of the State of Kansas.
Previous hereto and more specifically on the 23rd day of June, 1982 a hearing was held in this appeal at the State Office Building, Topeka, Kansas. The appellant appeared represented by its counsel, Mr. Joseph H. McDowell and Mr. Carl S. Black; the Director of Taxation appeared represented by Mr. Jules V. Doty. The Board, having considered the evidence given thereat as well as that contained within its files, finds and concludes as follows:
1. The Board has jurisdiction of the subject and the parties hereto pursuant to K.S.A. 74-2437(a).
2. The parties hereto have stipulated to the use of the record made at the hearing before the Director of Taxation, in lieu of a trial de novo before this Board.
3. Three issues are presented by Pioneer Bag Company of Kansas, Inc. (hereafter Pioneer Bag) in this appeal;
1. Is the Pioneer Bag Company of Kansas and its parent corporation, Pioneer Container Corporation, engaged in a unitary business?
2. Is the combined report method of allocation an apportionment of income and expenses authorized by Kansas law?
3. If questions one and two are answered in the affirmative, does the tax imposed on Pioneer Bag result in an unconstitutional application of the taxing statute to, in effect, tax more than 100 percent of the income of Pioneer Bag?
4. At the hearing and closing argument in this matter, upon the submission of all briefs by the parties, the evidence revealed that prior to the formation of pioneer Bag all of the assets and property used to form the company were owned by Pioneer Container Corporation, a Missouri corporation (hereinafter referred to as Pioneer Container). Pioneer Bag was incorporated for the express purpose of selling off the burlap bag division to a third party. The sale was never consummated and Mr. William Gore was hired by Pioneer Container as general manager to operate the Pioneer Bag. During the tax years at issue (February 25, 1978 through February 24, 1980) Mr. Gore operated the plant manufacturing burlap bags and made sales of burlap bags and paper bags (the latter being manufactured by Pioneer Container). A salesman for Pioneer Container sold burlap bags, as well as paper bags, which were manufactured by Pioneer Bag.
Pioneer Container paid the bills of Pioneer Bag from co-mingled funds. The funds of the two companies were kept in one bank account at Commerce Bank at Kansas City. With the exception of the payroll account for Pioneer Bag, the funds received on sales by Pioneer Bag were never separated from the funds of Pioneer Container. Only one cash receipt book was kept for both companies, and this was kept by Pioneer Container. The separation of the receipts was reflected only by bookkeeping transactions. An executive of Pioneer Container signed all of the checks for each company. Mr. Gore, who managed Pioneer Bag, was not authorized to sign checks. The operating status of Pioneer Bag was never known until the annual tax returns were prepared. Pioneer Container paid all of the debts of Pioneer Bag regardless of the profit or loss status.
Both companies were in the bag business, manufacturing burlap, cotton and paper bags primarily for the agriculture industry. The Boards of Director were interlocking. Control of Pioneer Bag was in pioneer Container, which owned 100 percent of the stock of Pioneer Bag.
There were mutual benefits to each company from the other. The expertise of the executive staff of Pioneer Container, such as accounting services, financing, business experience and operational expertise, were furnished to Pioneer Bag. The availability of Mr. Gore to sell paper bags for Pioneer Container to customers he called on and the same benefit to Pioneer Bag for sales to customers of Pioneer Container by its salesmen was of benefit, one to the other.
The two companies were operated as one out of the offices of Pioneer Container in Missouri. Pioneer Bag was dependent upon Container for accounting services, management expertise and financing. Without these services Pioneer Bag could not operate.
5. The Board therefore concludes that the two companies are operating a unitary business. The definition of a unitary business was set out by the Kansas Supreme Court in Crawford Manufacturing Co. v. State Commission of Revenue and Taxation, 180 Kan. 352 (1956). At syllabus number 1 and 2 it states the following:
"A multistate business is a unitary business for income tax purposes when the operations conducted in one state benefit and are benefited by the operations conducted in another state or states . . . The essential test to be applied is whether or not the operation of the portion of the business within the state is dependent upon or contributory to the operation of the business outside the state. If there is such a relationship, the business is unitary.
case the facts were similar to case here being reviewed. The company headquarters kept the books for all the manufacturing plants in other states; fiscal policies were planned and carried out at the home office; and central purchasing was done by the home office. The Court stated that the operation of the central purchasing division alone demonstrates clearly that Crawford's home office and its three manufacturing plants stand in the relationship of reflected dependency, mutual contribution and mutual benefits.
In the area of persuasive authority, the Board examines
Container Corporation of America v. Franchise Tax Board
, 173 Cal. Rptr. 121 (app. Div.) where the California Court enunciated three factors a court must consider in determining whether a business is unitary. They are: unity of ownership; unity of operations as evidenced by central purchasing, accounting and management; and, unity of use in its centralized executive force and general system of operation. All of these tests have been met in the instant case.
The Board therefore finds that Pioneer Bag and Pioneer Container were engaged in a unitary business during the period of time under appeal in the case herein.
6. The Board further finds that Kansas has the authority pursuant to K.S.A. 79-32,141 to require the combined report method of allocation of income and expenses, when it is found that two or more corporations are engaged in a multistate or multinational unitary business. This authority was established by the Kansas Supreme Court as early as 1939 in
In re Morton Salt Co
., 150 Kan. 650. In that case the court interpreted GS 1935, 79-3219(b) which has since been amended and codified as K.S.A. 79-32,141.
Edison California Stores, Inc. v. McColgan
, 183 P.2d 16, the Court cited the Morton Salt case in determining that California could combine the unitary operations of taxpayer's multistate business for tax purposes. The statute in that case was similar to K.S.A. 79-32,141.
Joslin Drygoods Company v. Joseph Dolan
, 615 P.2d 15, the Colorado Court in interpreting a statute identical to K.S.A. 79-32,141 states that the statute provides that the revenue department may distribute or allocate income and deductions, or may require returns on a consolidated basis. The Court concluded that it is the statutory provision for distribution and allocation of income and deductions which authorizes the department to require combined reports, since a combined report does allocate or apportion income.
The Board therefore concludes that a combined report method of allocation and apportionment of income and expense is authorized by Kansas law.
7. The Board believes the final issue presented by the appellant relating to taxation of more than 100 percent of the corporation's income was addressed by the United States Supreme Court in
Moorman Mfg. Co. v. Bair
, 437 U.S. 267, 57 L.Ed 2d 197 (1978), where the Court held in part III of the opinion that the fact that a particular allocation formula may permit a state to tax some income actually "located" in another state is not in and of itself a basis for finding a due process violation. The court also would not find the allocation formulae under the facts of the case to be in violation of the Commerce Clause. In the case at hand, Pioneer Bag has not shown any specific evidence of a discriminatory taxing procedure. An examination of the record below reveals merely an inference that more than 100 percent of Pioneer Bag's income might be taxed, but no specific numbers were submitted which show a discriminatory taxing scheme. On the record below such an existence is considered speculative. The Board therefore finds that some risk of duplicative taxation exists wherever the states in which a corporation does business do not follow identical rules for the division of income. The Board, following the direction of
decision believes that to prevent duplicative taxation would require national uniform rules for the division of income Such rules do not exist.
The Board therefore finds that the method of allocation and apportionment of income and expenses, authorized under the law, have not been applied in an unconstitutional manner.
IT IS, THEREFORE, BY THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS, CONSIDRED AND ORDERED that the decision of the Director of Taxation rendered the 12th day of may, 1982, be sustained in the amount of $10,654., plus interest at the statutory rate. Said payment is declared to be due and payable within 30 days form the date of certification of this order
IT IS SO ORDERED
CHARLES B. JOSEPH, CHAIRMAN
REX R. MORGEN, MEMBER
DALLAS E. CRABLE, MEMBER
JOHN P. BENNETT, MEMBER
KARL V. COZAD, SECRETARY ROBERT C. HENRY, MEMBER
OFFICE OF THE BOARD OF TAX APPEALS OF THE STATE OF KANSAS
I., Karl V. Cozad, Secretary of the Board of Tax Appeals of the State of Kansas, do hereby certify that a true and correct copy of the Order No. 158282 DT made by said Board, as the same appears and is a matter of record in my office.
IN TESTIMONY WHEREOF, I have hereunto subscribed my name and affixed the official seal of the Board of Tax Appeals at Topeka, Kansas, this 13th day of August, 1982.
KARL V. COZAD
Return to KSA Listing