SUPER VALUE STORES, INC. Petitioner, vs. DEPARTMENT OF REVENUE, Respondent.
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SUPER VALUE STORES, INC. Petitioner, vs. DEPARTMENT OF REVENUE, Respondent. Iowa District Court, Polk CountyPolk iowadistCASE NO. AA 1571RULING
Hearing on Petition for Judicial Review was held before this Court. The Court having read the transcript, file and briefs of the attorneys, and having heard arguments from John W. Windhorst, Jr., Petitioner's attorney, and Harry M. Griger, Respondent's attorney, finds as follows:FINDINGS OF FACT
1. The Petitioner, Super Valu Stores Inc., sold a wholly owned subsidiary, County Seat. It allocated all the gain from the sale to the state of Minnesota, its commercial domicile, as nonbusiness income on its corporate income tax return for the taxable year 1985. The Respondent determined this gain was business income and assessed the Petitioner additional Iowa corporation income tax of Three Hundred Ninety Five Thousand Five Hundred Ninety Seven Dollars and Twenty Three Cents ($395,097.23) plus interest. On October 11, 1988 a hearing was held before the administrative law judge (ALJ). The ALJ in her Order dated November 20, 1980 ruled as follows:Contributions to the income of the subsidiary resulted from the functional integration, centralization of management and economies of scale between Super Valu and its subsidiary, County Seat. For that reason, Super Valu was engaged in a unitary business operation and is subject to Iowa taxation on an apportionment formula basis rather than on a separate accounting basis. Super Valu's capital gain on the sale of County Seat stock is part of Super Valu's apportionable business income. The Department's assessment is affirmed.
3. An appeal was taken by the Petitioner and on July 31, 1989 the Director issued his order affirming the Department's assessment and the ALJ's Order. The Director in his Order said at page 3 The Director finds that the administrative law judge's findings and Conclusions are supported by substantial evidence in the record. The Director adopts the administrative law judge's Proposed Order accept for the misstatements which the parties agree should be corrected and the revisions to conform to the supplemental stipulation to which the parties agree.
The Statement of the Case in the Proposed Order is adopted by the Director with an added reference to the supplemental stipulation and affidavit. A reference to the supplemental stipulation and affidavit also is added to the first unnumbered paragraph under the heading Findings of Fact. The remaining paragraphs and the Findings of Fact have been numbered as well as renumbered. The amendments made to the Findings of Fact are explained as follows:
The Director affirmed the ALJ's decision and the Department's assessment. This Petition for Judicial Review followed. 4. This Court accepts the ALJ's findings of fact as amended by the Director and incorporates them in this Order as if set out in full herein.CONCLUSIONS OF LAW
As stated on page 1 of the Petitioner's Reply Brief:The sole issue in this case is whether at the time the Super Valu stores Inc., (Super Valu) realized a capital gain upon the sale of all of its stock in County Seat Stores, Inc., (County Seat) on May 25, 1984, the two corporations were engaged in a "unitary business". If so, the Capital gain in business income subject to apportionment. If not, the capital gain is non business income allacable to Minnesota Super Valu's commercial domicile.
The Petitioner allocated the gain from the sale of its stock in County Seat to Minnesota, its commercial domicile, as a nonbusiness capital gain pursuant to Iowa Code § 422.33(2)(a)(4). The applicable part of that section states:Gain and losses from the sale or disposition of tangible personal property are allocable to this state if the taxpayer's commercial domicile is in this state.
The Respondent claimed the gain to be business income subject to apportionment under Iowa Code § 422.33(2)(b). The Petitioner maintains that the capital gain from the sale of its County Seat stock is business income subject to apportionment only if, County Seat was a part of Super Valu's unitary business. The Petitioner further maintains that County Seat was not a part of Super Valu's unitary business and that the gain was therefore properly allocated to Minnesota as nonbusiness capital gain. "The linchpin of apportionalbility in the field of state income taxation (of an interstate interprise) is the unitary business principle". Mobile Oil Corporation v. Commissioner of Taxes, 100 S.Ct. 1223, 1232 (1980).A number of state courts have described, adopted, applied and interpreted the unitary business principle. Unfortunately, the Iowa Supreme Court is not one of them. Some of those state decisions have reached the United States Supreme Court. One of them is the case of Container Corporation of America v. Franchise Tax Board, 103 S.Ct. 2933 (1983) Both parties have cited this case since it is the most recent decision, on closely related facts, on the unitary issue decided by the United States Supreme Court. In that case Container Corporation of America (Container) was in the business of manufacturing custom ordered paper board packaging. It controlled twenty foreign subsidiaries in Latin America and Europe. All but two of the subsidiaries were in the same business as Container in their respective local markets. They were relatively autonimous concerning matters of personnel and day to day management. A Senior Vice- Precident and four other officers of Container supervised the subsidiaries and established "general standards of professionalism, profitability and ethical practices and dealt with major problems and long term decisions". Id at 2944. Container "had a number of directors and officers on the board of directors of the subsidiaries, but did not generally play an active role in the management decisions." Id at 2944. As pointed out by the Director at page 24 in his Order of July 31, 1989, "The parallel between the facts in Container and those in this case is striking. In almost every respect Super Valu's operational relationship with County Seat was as close as or greatly exceeded that which existed between Container Corp. and its subsidiaries." The Director continued to compare the Container case with the case at hand on pages 24-26 of his Order and concluded by saying on page 26, "Each criterion suggested by the Supreme Court in Container, before a unitary business can be found, is met by the close operational relationship which existed between Super Valu and County Seat." The Petitioner maintains that in order to have a unitary business the corporations must operate related businesses; if not the same business, they must at least be similar. The Petitioner cites Container for this proposition. Container, however, clearly points out that when the businesses are related or similar it is "but only as one element among many" when concluding if the businesses are unitary. Id at 2947. The Respondent in its brief filed March 13, 1990, cited nine state court cases that rejected Super Valu's position that unitary business only exist where they are from the same or similar business or those involved in related steps in a common process. In the Container case, Id at page 2947, the Court said, "The prerequisite to a constitutionally accepted finding of unitary business is a flow of value, not a flow of goods." The taxpayer has the burden to show that the Department assessment was erroneous. Richards v. Iowa Dept. of Revenue, 360 N.W. 2d 830, 831 ( Iowa 1985). "The general rule, applicable here, is that a taxpayer claiming immunity from a tax has the burden of establishing his exemption. Container, Id at 2945. The Petitioner has not met its burden. There is substantial evidence to support the Department's decision. The Department has correctly applied the applicable law. The Department's ruling should be sustained. IT IS THEREFORE ORDERED, ADJUDGED AND DECREED that the decision of the Department of Revenue and Finance is AFFIRMED. The Petitioner shall pay the costs of this action. Dated this 21st day of September, 1990.JACK D. LEVIN, JUDGE FIFTH JUDICIAL DISTRICT