Steiner Corporation v. Auditing Division - Utah State Tax Comm
Annotate this Casepublication in the Pacific Reporter.
IN THE SUPREME COURT OF THE STATE
OF UTAH
----oo0oo----
Steiner Corporation,
Petitioner,
v.
Auditing Division of the
Utah State Tax Commission,
Respondent.
No. 980016
F I L E D
May 25, 1999
1999 UT 53
---
Original Proceeding in this Court
Attorneys:
William H. Adams, Peter W. Billings,
Salt Lake City, for petitioner
Jan Graham, Att'y Gen., Brian L.
Tarbet, Clark Snelson, Asst. Att'ys Gen.,
Salt Lake City, for respondent
--- STEWART, Justice:
¶1
Steiner Corporation filed a writ
of review from a Utah State Tax Commission decision issued December 15,
1997 (the "1997 Decision"),(1) holding that
a loss from Steiner's sale of its subsidiary corporation, Steiner Financial,
was only partially deductible from Steiner's income because Steiner and
Steiner Financial were a unitary business. Steiner argues that the 1997
Decision is arbitrary and capricious because it (1) is contrary to a controlling
1987 Commission decision (the "1987 Decision"),(2)
and (2) applied retroactively. We affirm.
I. BACKGROUND
A. Uniform Division of Income for Tax Purposes Act ("UDITPA")
¶2
This case requires a short explanation
of Utah corporate income tax under the UDITPA, Utah Code Ann. tit. 59,
ch. 7, pt. 3 (1987).(3) This Act applies
to corporations that receive income from business activities in more than
one state. Like many states, Utah distinguishes between the business and
nonbusiness income of such corporations. Business income arises "from transactions
and activity in the regular course of the taxpayer's trade or business."
Id. § 59-7-302(1). All income is presumed business income "unless
clearly classifiable as nonbusiness income." Utah Admin. Code R.865-08F-1(A)
(1987). Nonbusiness income is "all income other than business income,"
Utah Code Ann. § 59-7-302(7), and is "narrowly construed." Utah Admin.
Code R.865-08F-1(A)(1). A corporation that is incorporated in Utah or that
has its principal place of business in Utah must pay a franchise tax in
Utah. See Utah Admin. Code R.865-6F-1(A) (1997); see also
Utah Code Ann. §§ 59-7-101(5), -102. This tax is based on all
of its nonbusiness income and a portion of its business income. See
Utah Code Ann. §§ 59-7-306, -308, -311. The portion of business
income that is taxed is based on a statutory apportioning formula. See
id. § 59-7-311. Conversely, when losses occur, such a corporation
may deduct from its income the entire amount of a nonbusiness loss and
a portion of a business loss. See id. §§ 59-7-108(5),
-306, -308.
¶3
It is undisputed that a corporation's
gain or loss from the sale of stock of a subsidiary is treated as a business
income gain or loss if the corporation and the subsidiary are a "unitary
business." Before 1986, neither the Code nor the Commission's Rules defined
"unitary business," but the Commission considered "commonly used" factors
such as centralization of management, functional integration, common ownership,
and economies of scale, to determine if a parent and a subsidiary operated
a unitary business. See 1987 Decision at 4-5.
¶4
In 1986 the Legislature included
a definition of "unitary business" in Utah Code Ann. § 59-7-302(15)
(1987):
(a) "Unitary business" and
"unitary group" are interchangeable and mean two or more corporations related
through common ownership whose business activities are integrated with,
dependent upon, and contribute to each other.
(b) "Unitary business" or "unitary group" does not include any corporation related by stock ownership or otherwise to any corporation liable to report under §§ 59-7-301 through 59-7-321 whose principle business activities relate to a separate and distinct line of business. Utah Code Ann. § 59-7-302(15). This definition is specific to the UDITPA.(4)
B. Facts
¶5
The parties stipulated to the following
facts unless otherwise stated. Steiner is a Nevada corporation with its
principal place of business in Utah. It is in the linen supply business
and has owned subsidiaries that operated a variety of businesses. In 1982
Steiner sold its subsidiary American Savings & Loan for a $9,545,223
gain. On its 1982 Utah tax return, Steiner reported this gain as "business
income" and paid Utah taxes on only a portion of that income. The Auditing
Division disagreed and ordered Steiner to pay tax on the entire gain.
¶6
Steiner appealed. On June 5, 1987,
after a formal hearing, the Commission sustained the Auditing Division
and held that Steiner and American Savings were not a unitary business
and that Steiner's gain was therefore nonbusiness and fully taxable. Relying
on the nonstatutory standards stated above, ¶ 3, the Commission found
that the corporations shared common ownership but not centralized management,
functional integration, economies of scale, and significant flow of value
between themselves. Because the Commission ruled that Steiner and American
Savings were not a unitary business, Steiner had to pay tax on the entire
gain from the American Savings sale. Steiner appealed to district court.
¶7
In November 1990 the district court
held, contrary to the Commission, that Steiner and American Savings were
a unitary business and therefore the gain from the sale of American Savings
was not fully taxable. The court applied the same standards the Commission
had used; however, it found that the corporations shared centralized management,
functional integration, economies of scale, and a significant flow of value
between themselves. The district court reversed the Commission's 1987 Decision,
required the Commission to recalculate Steiner's 1982 tax liability, and
ordered it to refund to Steiner excess taxes, penalties, and interest.
The Commission did not appeal and complied with the district court decision.
¶8
In 1988, after the 1987 decision
but before the district court decision, Steiner sold another subsidiary,
Steiner Financial, for a $46,566,528 loss. Steiner treated itself and Steiner
Financial as a nonunitary business and deducted the entire amount from
its 1988 income as a nonbusiness loss. Steiner alleges that it relied on
the 1987 Decision in treating itself and Steiner Financial as a nonunitary
business. On appeal, Steiner and the Commission stipulated that the relationship
between Steiner and American Savings was approximately the same as the
relationship between Steiner and Steiner Financial. The Commission ruled
in December 1997 that neither the prior district court decision nor its
own 1987 Decision was binding. In accord with the stipulation and the Commission's
order on remand after the 1989 district court decision, but contrary to
its position in the 1987 Decision, the Commission concluded that Steiner
and Steiner Financial operated as a unitary business, that the $46,566,528
loss realized by Steiner from the sale of Steiner Financial was a business
loss, and that the loss was only partially deductible.(5)
Steiner filed a writ of review from this Court.(6)
¶9
Steiner argues that the 1997 Decision
is arbitrary and capricious under the Utah Administrative Procedures Act,
Utah Code Ann. § 63-46b-16(4)(h)(iv),(7)
because that decision is inconsistent with the 1987 Decision in ruling
that Steiner and Steiner Financial conducted a unitary business, which
meant that the loss was a business loss and therefore only partially deductible.
Steiner argues that the 1987 Decision controls as a matter of stare decisis
with respect to whether Steiner operated a unitary business, and that the
Commission therefore violated Utah Code Ann. § 63-46b-16(4)(h)(iii)(8)
because the 1997 Decision is contrary to "the agency's prior practice,"
and the Commission did not "justif[y] the inconsistency." Id. Steiner
also argues that the 1987 Decision established a Commission "policy" that
subsequent agency decisions were obligated to follow and any change of
that policy required formal rule making procedures. Finally, Steiner argues
that the 1997 Decision is arbitrary and capricious because it changed agency
law retroactively. Steiner does not directly contest the merits of the
1997 Decision; namely, whether the Commission correctly determined, aside
from the 1987 Decision, that it operated as a unitary business with Steiner
Financial.
II. PRECEDENTIAL EFFECT OF AN OVERRULED AGENCY DECISION
¶10
Review of the 1997 Decision raises
the question whether an administrative decision that is reversed by a court
on appeal binds an agency in later administrative decisions. Salt Lake
Citizens Congress v. Mountain States Telephone & Telegraph Co.,
846 P.2d 1245 (Utah 1992), answers that question negatively.
¶11
Mountain States held that
rules established in formal agency adjudications have the force of stare
decisis in future agency decisions:
The adjudication of every
case requires the application of one or more rules of law. A rule of law,
whether pre-existing or newly established, that serves as the major premise
of an adjudicatory syllogism, necessarily governs all subsequent cases
properly falling within the scope of the rule. This is so even when the
particular facts in subsequent cases are different and res judicata does
not apply.
Id. at 1252.
¶12
Mountain States stands for
the proposition that it would be arbitrary and capricious for an agency
to apply a different rule of law in a future case with similar facts. Seeid.
at 1252. It is as arbitrary and capricious to apply the same law to the
same facts and reach a different result as it is to apply a different rule
in a factually similar situation. Simply put, "Stare decisis means
that like facts will receive like treatment in a court of law." Flowers
v. United States, 764 F.2d 759, 761 (11th Cir. 1985); see also
Tops-Toeller, Inc. v. City of Lansing, 209 N.W.2d 843, 848 (Mich.
Ct. App. 1973); State v. McBride, 463 S.E.2d 403, 405 (N.C. Ct.
App. 1995). The holding of an agency adjudication, or the application of
a rule of law to the facts in that case, binds an agency in subsequent
decisions under Mountain States.
¶13
Nevertheless, agency precedent is
subject to reversal. As Mountain States held, "the Commission [could]
specifically overrule[] the decision or the decision [could be] changed
or set aside by formal rule, statute, or court decision." Mountain
States, 846 P.2d at 1253 (emphasis added). If reversed, the holding
would no longer have stare decisis effect. That is what has occurred in
this case. The district court decision overruled the 1987 Decision; therefore,
Steiner's argument that the 1987 Decision controls this case under stare
decisis fails.
¶14
Steiner's section 63-46b-16(4)(h)(iii)
argument fails for the same reason. Under that section, an "appellate court
shall grant relief only if . . . (h) the agency action is . . . (iii) contrary
to the agency's prior practice, unless the agency justifies the inconsistency
by giving facts and reasons that demonstrate a fair and rational basis
for the inconsistency." It is true that the 1997 Decision is inconsistent
with the 1987 Decision; however, the 1997 Decision is consistent with the
1990 district court decision reversing the 1987 Decision and with the Commission's
subsequent refund of Steiner's taxes on remand from the district court.
In short, the Commission's ruling in the 1997 Decision that Steiner and
Steiner Financial were a unitary business is wholly consistent with its
adoption of the district court decision and its refunding Steiner's taxes
after the appeal from the 1987 Decision.
¶15
Steiner in effect rejects the portion
of the above analysis that is based on the district court's reversal of
the 1987 Decision. Steiner argues that under rule 4-508(1) of the Utah
Rules of Judicial Administration, the district court decision, an unpublished
memorandum opinion, has "no precedential value," cannot "be cited or used
. . . except for purposes of applying the doctrines of the law of the case,
res judicata, or collateral estoppel," id., and therefore should
be wholly ignored in this case.(9) We do
not decide whether the doctrine of law of the case, res judicata, or collateral
estoppel require that the 1989 district court decision be given binding
effect in the Commission's 1997 Decision. Nevertheless, it is critical
that Steiner and the Commission stipulated that the facts underlying the
1997 Decision are "substantially" the same facts that underlay the 1987
Decision. It necessarily follows that those same facts underlay the 1990
district court decision and the Commission's decision on remand from the
district court decision. Thus, given the stipulation, and irrespective
of whether the precise requirements of res judicata, collateral estoppel,
or law of the case are met, the fact of the unitary nature of Steiner's
and Steiner Financial's business has in effect been adjudicated between
the Commission and Steiner, and for that reason the district court decision
legitimately has a direct bearing on the 1997 Decision.
¶16
Furthermore, we cannot ignore the
additional fact that, apart from the 1990 district court opinion itself,
the Commission's 1997 Decision is consistent with the Commission's action
following the district court remand. By not appealing that decision, the
Commission itself, in effect, acceded to it. After the district court decision,
the Commission treated Steiner and American Savings as a unified business
and refunded Steiner's excess 1982 taxes. The Commission action clearly
and necessarily rested on the district court's conclusion that Steiner
and American Savings were a unified business. The Commission's 1997 Decision,
which treated Steiner and Steiner Financial as a unified business also,
was totally consistent with the Commission's actions after the district
court reversed the 1987 Decision.
¶17
Finally, Steiner argues that under
Williams v. Public Service Commission, the Commission could not
"reverse its long-settled position [i.e., the 1987 Decision] . . . and
announce a fundamental policy change without following the requirements
of the Utah Administrative Rule Making Act." 720 P.2d 773, 777 (Utah 1986).
In Williams, the Court set aside a Public Service Commission ("PSC")
decision that was contrary to law the PSC had previously applied. See
id. at 776. However, Williams is inapplicable here. It was
not the Commission but the district court that reversed the 1987 Decision.
The 1997 Decision is consistent with its relevant prior practice.
¶18
In conclusion, the Commission's
decision was not arbitrary and capricious. Affirmed.
---
¶19
Chief Justice Howe, Associate Chief
Justice Durham, Justice Zimmerman and Justice Russon concur in Justice
Stewart's opinion.
1. Tax Commission Decision, Appeal No. 95-1889 (decided Dec. 15, 1997).
2. Tax Commission Decision, Appeal No. 84-1111 (decided June 5, 1987).
3. Unless otherwise
mentioned, identical statutory sections to the sections cited in this opinion
were previously found at Utah Code Ann. § 59-13-78 to -97 (1974),
which were in force when the events underlying the 1987 Decision occurred.
The UDITPA, 7A U.L.A. 356 (1999),
was approved in 1957 for use by states that tax corporate citizens on net
income. Many corporations earn income from business activities in more
than one state. The purpose of the UDITPA is to provide a unified method
of dividing a corporation's income among states in which it earns income
so that the corporation is truly taxed on its net income. Utah adopted
the UDITPA in 1967. See 1967 Utah Laws ch. 158.
4. In 1993, the Legislature repealed section 59-7-302(15) and enacted section 59-7-101(27). This section is virtually identical to the standard stated in the 1987 Decision and is applicable to the entire corporate income tax chapter, title 59, chapter 7. Section 101(27) provides: "Unitary group" means a group of corporations that: (a) are related through common ownership; and
(b) are economically interdependent
with one another as demonstrated by the following factors:
(i) centralized management;
(ii) functional integration;
(iii) economies of scale.
Utah Code Ann. § 59-7-101(27) (Supp.
1993).
5. The Commission stated: Whether [Steiner and Steiner Financial] were separate or unitary depends upon the manner in which the business was conducted and the level of integration between them. The parties in this matter presented no evidence as to the nature of [their] operations. Both parties stipulated that the relationship between [Steiner and American Savings] was approximately the same as the relationship between [Steiner] and Steiner Financial. . . . On that basis, we assume the following facts to be true: 1. During the audit period [Steiner] owned all or nearly all of the Steiner Financial stock.
2. An officer of [Steiner] corporation served as a director of Steiner Financial and had veto power over Steiner Financial's corporate decisions.
3. [Steiner] exercised some control over the financial matters of Steiner Financial relating to budgeting, audits, tax preparation, and financial reporting.
4. During the audit period and in previous tax years, [Steiner] held a number of subsidiaries engaged in the financial services industry. Equity and income from these subsidiaries comprised a substantial portion of [Steiner's] operations.
5. [Steiner] and Steiner Financial shared a common pension plan and executive bonus plan. Under Utah Code section 59-7-302(15)(a) (Supp. 1988), [Steiner] and Steiner Financial comprised a unitary business if they were related through common ownership and their business activities were integrated, dependant and contributed to each other. . . . On the basis of [the above] facts, we find sufficient interdependence between [Steiner] and Steiner Financial to treat the operations as a unitary business. 1997 Decision at 7-8.
6. Utah Code Ann. § 63-46b-16(1) (1997) grants the Supreme Court appellate jurisdiction, "[a]s provided by statute . . . to review all final agency action resulting from formal adjudicative proceedings." Utah Code Ann. § 78-2-2(3)(e)(ii) grants this Court jurisdiction to review Commission decisions.
7. This section
states:
(4) The appellate court
shall grant relief [on appeal from a formal agency adjudicative decision]
only if, on the basis of the agency's record, it determines that a person
seeking judicial review has been substantially prejudiced by any of the
following:
. . . ;
(h) the agency action is:
. . . ;
(iv) . . . arbitrary and capricious.
Id. § 63-46b-16(4)(h)(iv).
8. This section
states:
(4) The appellate court
shall grant relief [on appeal from a formal agency adjudicative decision]
only if, on the basis of the agency's record, it determines that a person
seeking judicial review has been substantially prejudiced by any of the
following:
. . . ;
(h) the agency action is:
. . . ;
(iii) contrary to the agency's prior
practice, unless the agency justifies the inconsistency by giving facts
and reasons that demonstrate a fair and rational basis for the inconsistency
. . . .
Id. § 63-46b-16(4)(h)(iii).
9. A primary purpose of rule 4-508 is to assure that all persons have access to court decisions that state the law. Only a very limited group of people have access to unpublished decisions. Clearly Steiner, as a party to the district court decision, had access to and knowledge of that decision.
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