IN THE MATTER OF NORTHERN NATURAL GAS COMPANY AND NORTHERN PROPANE GAS COMPANY 2223 Dodge Street Omaha, Nebraska 68102

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IN THE MATTER OF NORTHERN NATURAL GAS COMPANY AND NORTHERN PROPANE GAS COMPANY 2223 Dodge Street Omaha, Nebraska 68102

Department of Revenue and Finance

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74-20-2A-A 76-153-2A-A

ORDER

Pursuant to a Notice of Time, Place and Nature of Hearing, the above- entitled matter came on for hearing before the undersigned on December 4, 1979, at 1:00 p.m. Appearing on behalf of the Iowa Department of Revenue (hereinafter referred to as "Department") were Harry M. Griger and L. Joseph Price, Assistant Attorneys General and authorized representatives for G. D. Bair, Director. Appearing on behalf of Northern Natural Gas Company (hereinafter referred to as "Northern Natural" or "Protector") and Northern Propane Gas Company (hereinafter referred to as "Northern Propane or "Protestor") was Donald Gonnerman, Attorney at Law and the Protestors' authorized representative. The parties, at the hearing, presented no testimony, but certain exhibits were presented for admission into evidence in addition to a stipulation. Joint exhibits 1-A through 16-P were submitted for admission, and admitted into evidence by the Hearing Officer. The Protestors' exhibits 1 and 2 and the Department's exhibit A were tendered and admitted without objection. The Protestors' exhibit 3 was tendered for admission, and objection to its admissibility was made by Mr. Griger. The Hearing Officer reserved judgement on the admissibility of the exhibit, stating that he would rule regarding admissibility in the Order. Pursuant to an Order of Prehearing Conference, briefs were submitted at the hearing, reply briefs were submitted within 10 working days of the hearing, on December 18, 1979.

STATEMENT OF THE CASE

1.          The Department in a Notice of Assessment dated February 11, 1974, assessed against Northern Natural additional corporate income tax alleged to be due for the years 1962 through 1972 inclusive. In a Notice of Assessment dated June 28, 1976, the Department assessed against Northern Propane additional corporate income tax alleged to be due for the years 1971 through 1974.

2.          Pursuant to section 422.41, The Code, and, in the case of Northern Propane rule 730-7.8(17A) IAC, the Protestors filed separate Protests raising various assignments of error. The issues raised by the Protestors were reviewed by the Department's Tax Review Committee as provided in subrule 730- 7.11(1) IAC. Several adjustments in favor of the Protestors were made; however, the Tax Review Committee determined that substantial amounts remained due and owing from each Protestor. The record does not indicate that any statement of agreement or disagreement with the conclusions of the Tax Review Committee was ever received from the Protestors. Therefore, pursuant to rule 730-7.12(17A) IAC the Department subsequently filed an Answer to each Protest. The matter was then set down for hearing in a "Notice of Time, Place and Nature of Hearing issued on November 29, 1978. That Notice contained an Order consolidating the Protests of Northern Natural and Northern Propane.

3.          Subsequently, at the request of the Department's representative, a "Notice of Prehearing Conference" was issued. The prehearing conference was scheduled for and held on March 13, 1979. An Order of Prehearing Conference was issued on March 22, 1979. Hearing was later scheduled for December 4, 1979, in a second Notice of Time, Place and Nature of Hearing, dated July 25, 1979.

FINDINGS OF FACT

On July 25, 1979, a Notice of Time, Place and Nature of Hearing was sent- by certified mail to the parties by the Hearings Division of the Department. That Notice scheduled an evidentiary hearing for December 4, 1979, at the Hoover State Office Building, Des Moines, Iowa. Department representatives and a representative of the Protestors appeared at the hearing. A stipulation of fact, the Department's exhibit A, Protestors' exhibits 1 and 2 and joint exhibits 1-A through 15-O were admitted into evidence by the Hearing Officer without objection from either party. Subsequent findings of fact are taken from that stipulation and the exhibits. No testimony was taken at the hearing.

The Department's representative, Mr. Griger, objected to the admission into evidence of Protestors' proposed exhibit number 3. The Officer stated that he would reserve judgement on the admissibility of that document, and that he would rule upon its admissibility in this Order. Mr. Griger's objection to the exhibit was based upon relevancy. Having considered the matter, the Officer finds that the proposed exhibit 3 is irrelevant to any contention at issue in this case. The exhibit was tendered for the purpose of proving that the Department's Property Tax Division utilizes the concept of traffic units in its Central Assessment System for property tax. The Protestor asserts that this is true, and the Department does not contest that fact. Because the Department does not contest the fact that its Property Tax Division utilizes traffic units, it is not necessary for the Protestor to prove it, and the document proving it, Protestors' exhibit 3, is irrelevant to the proceedings.

To facilitate understanding of the case subsequent findings of fact are divided into three divisions to correspond to the three issues raised in this combined proceeding. The divisions are numbered I, II and III. Paragraphs within each of the three divisions are numbered first with a Roman Numeral to indicate the division and then with an Arabic numeral to indicate the sequence of each particular paragraph within the division.

DIVISION I

Findings of Fact in regard to the issue of the proper method of apportionment of Northern Natural's income for the years 1962 through 1972.

I-1. Northern Natural is a corporation, chartered in Delaware. The Protestor does business in Iowa and a number of other states. The Protestor also owns a number of subsidiary corporations; one of these is the wholly- owned subsidiary Northern Propane.

I-2. Northern Natural owns and operates a natural gas pipeline transmission system. The following description of the system is drawn from documents describing the system as it existed during the calendar year 1972. However, the evidence is suitable to indicate that the description accurately describes the system as it existed during the years 1962 through 1972.

I-3. Natural gas enters the Protestor's pipeline transmission system in the following manner: the gas is purchased from various owners of gas wells. These wells are situated in Texas, Oklahoma, Kansas, New Mexico, Montana and off-shore in the Gulf of Mexico. Additionally, gas enters the pipeline transmission system from a small number of wells which the Protestor itself owns. The gas enters the system by way of gas-gathering pipelines. The Protestor's pipeline transmission system consists of 4,983 miles of gas- gathering pipeline, 19,575 miles of gas transmission pipeline and 6,796 miles of gas distribution pipeline.

I-4. Title to and possession of the natural gas remains in the Protestor while the gas is pumped through its lines. The gas is sold to various third parties in the states in which the Protestor purchases gas. Additionally, the Protestor sells gas in Iowa, South Dakota, Illinois, Wisconsin, Michigan, Missouri, and Minnesota. Some gas is also sold to Canadian buyers at the Montana-Saskatchewan border.

I-5. One purchaser of the Protestor's natural gas is the Protestor's subsidiary Peoples Natural Gas Company. After purchasing the gas from Northern Natural, Peoples Natural Gas Company sells it directly to consumers. Gas is also sold "at town borders" to municipally-owned or privately-owned utilities not associated with Northern Natural. Title to and possession of the gas are transferred to the utilities as a result of these sales. The utilities consume the natural gas themselves or resell it to residential, commercial and industrial users. Typical Iowa customers include the towns of Cascade, Coon Rapids and Osage and the private utilities Iowa-Illinois Gas and Electric Company and Iowa Public Service Company.

I-6. In 1972, approximately sixty-three percent of the operating revenue of the Protestor and its subsidiaries was earned as a result of the Protestor's sales of natural gas to various customers. The Protestor itself received 420 million dollars in operating revenue in 1972. Most of this revenue resulted from the sale of natural gas. Approximately 1.4 million in revenue was received in return for the Protestor's service of transporting natural gas. Title to this natural gas was held by persons other than the Protestor while the gas was in the Protestor's pipeline system. During the years 1962 through 1972, the Protestor received approximately one-half of one percent of its revenue from the transportation of natural gas. The Protestor's major assets consist of its pipeline system and equipment necessary to operate the system such as pumping stations and natural gas storage facilities.

I-7. The major expense associated with the Protestor's sales of natural gas is expense involving the maintenance, repair and operation of the pipeline transportation system. This expense includes, but is not limited to, labor costs, depreciation and costs of new pipeline equipment. A second but lesser major expense is the cost of natural gas purchased from the Protestor's suppliers.

I-8. The Protestor is a utility company. Various of its interstate operations are subject to the control of the Federal Government. Included in this federal control is regulation of rates. Regulated rates include the rate charged the Protestor for natural gas by its suppliers, the rates charged by the Protestor to customers who in turn resell gas to third parties and the rates charged by the Protestor for the service of transporting gas owned by others. Rates charged by the Protestor are regulated by the Federal Energy Regulatory Commission (F.E.R.C.). During the years 1962 through 1972, that body was known as the Federal Power Commission.

I-9. Any increase in the rates charged by the Protestor must be approved by the F.E.R.C. Approval is given only after a hearing at which the Protestor's customers and other interveners have the opportunity to appear. The Protestor must justify any request for increase in rates by submitting data proving the amount of its cost for selling or transporting gas for a certain period. Any increased rate granted should be sufficient to allow the Protestor to recover the cost of selling or transporting gas plus a reasonable profit. The major expenses upon which the rates are based are cost of gas purchased from the Protestor's suppliers and the costs of operating the Protestor's pipeline system.

I-10. Joint exhibit 16-F is the deposition of Robert E. Peirce, employed by the Protestor as a Regulatory Principal III in the Protestor's Regulatory Affairs Department. Mr. Peirce testified that the Protestor transported natural gas owned by other parties. Additionally, he testified that he did not know of the existence of any natural gas pipeline transmission system which was a common carrier of natural gas.

DIVISION II

Findings of Fact regarding the issue of estoppel.

II-1. For tax years prior to 1962, Northern Natural used a three-factor formula to apportion its income between Iowa and the other states in which it did business. The formula consisted of a ratio of sales, traffic units, and property within and without Iowa.

II-2. In 1962, the Protestor was informed by the then State Tax Commission that it could no longer utilize the three-factor formula. The Protestor was also informed that any use of section 422.33(2) "must follow the specific directions of said subsection and supporting regulations."

II-3. During the years 1962 through 1972, the Protestor apportioned income between Iowa and other states by using a traffic units formula and not by using a gross sales formula.

II-4. On April 28, 1967, the Tax Commission issued an assessment against the Protestor for the years 1957 through 1963. Additional tax in the amount of $30,000 was demanded for 1962 and $24,000 was demanded for 1963. There is no evidence that the assessment was issued because the auditor recomputed the Protestor's tax liability using a gross sales formula. The assessment was based upon the result of an audit conducted by the Internal Revenue Service.

II-5. On January 27, 1970, a Department auditor sent a letter to the Protestor demanding payment of $153,907.66 for the tax years 1965 and 1966. This letter was not an assessment. The auditor demanded additional payment because a federal tax adjustment had increased the Protestor's federal taxable income. In calculating the additional income due to Iowa, the auditor used the traffic units formula shown on the Protestor's returns for the years 1965 and 1966.

II-6. In its returns for the years 1962 through 1972, the Protestor clearly specified that it was using a traffic units formula to apportion its income. In several places on each return, the fact that the Protestor realized its income from the sale of natural gas is mentioned.

II-7. In the assessment of February 11, 1974, the Department first apportioned the Protestor's income using a ratio of gross sales within and without Iowa.

II-8. Mr. Peirce testified that if additional tax must be paid by the Protestor for the period of 1962 through 1972, that the amount of that tax cannot be recovered from the Protestor's customers because F.E.R.C. regulations prohibit the Protestor from passing on such non-recurring expenses to its customers. According to Mr. Peirce, the Protestor cannot increase its rates to recoupe the amount assessed against it by the Department.

DIVISION III

Findings of Fact regarding the federal income tax deduction issue and the right of the Hearing Officer to take official notice of certain matters.

III-1. Northern Natural's subsidiary, Northern Propane, does business within the State of Iowa. During each of the years 1969 through 1972, Northern Natural prepared and filed a consolidated federal income tax return which included income from itself and each of its subsidiaries. At the close of each of the years, Northern and each subsidiary calculated their potential federal income tax liability on a separate return basis. Those subsidiaries having federal taxable income on a separate return basis did not pay their tax directly to the Internal Revenue Service, but instead paid the amount of their federal tax so calculated to Northern Natural, the parent company. Northern Natural, in turn, paid the net consolidated federal taxes due from the consolidated group to the Internal Revenue Service.

III-2. In each of the years, certain of the subsidiaries incurred net operating losses. These losses were used to reduce the federal taxable income reported by Northern and its profitable subsidiaries on the consolidated return. Northern Natural paid to each loss subsidiary in the group the amount by which each subsidiary's operating loss reduced the federal income tax liability of the consolidated group.

III-3. During each of the years in question, Northern Natural calculated its federal income tax deduction on its separate Iowa tax returns on the basis of an amount equivalent to that which it would have paid to the Internal Revenue Service if it had filed separate federal tax returns. In the assessment issued against Northern Natural on February 11, 1974, for the years 1969 through 1972, inclusive, the Department computed Northern Natural's federal tax deduction to be limited to its share of the actual net consolidated federal income tax calculated by use of an "income producers" formula. This formula is determined by arriving at a percentage of Northern Natural's federal taxable income to the total federal taxable income of the profit companies included in the consolidated federal tax return. This percentage is then multiplied times the consolidated federal income liability after all credits (investment and foreign tax). This amount times fifty percent was determined by the Department to be Northern Natural's share of the consolidated federal income tax deduction which Northern Natural would be entitled to deduct on its Iowa returns.

III-4. In the assessment against Northern Propane, dated June 28, 1976, for the years 1971 through 1974, inclusive, the Department calculated Northern Propane's federal tax deduction on the same basis as it calculated Northern Natural's federal tax deduction. Like Northern Natural, Northern Propane was included in the federal consolidated income tax returns and elected to file separate Iowa income tax returns.

III-5. Regarding all three issues in this consolidated proceeding, the parties stipulated that the Hearing Officer may take official notice of all statutes and regulations of Iowa or any other state or the Federal Government without the necessity of the parties introducing such regulations or statutes into evidence.

CONCLUSIONS OF LAW

The Department has jurisdiction in this matter pursuant to section 422.28, The Code, made applicable by section 422.41, The Code 1979.

These Conclusions of Law will be numbered in three divisions, the divisions corresponding to the divisions contained in the Findings of Fact.

DIVISION I

I-1. The question to be resolved in this first division is whether Northern Natural, for the tax years 1962 through 1972 is entitled to apportion its net income between Iowa and other states using a ratio of traffic units or whether it is required, by law, to apportion the net income using a single sales factor formula. The Department argues that Northern Natural must use a single sales factor formula. The Protestor argues that it may use the traffic units formula.

I-2. The Protestor contends that it is lawful to apportion its income by the traffic units method because the existence of Department regulation 22.33(1)-10, 1973 I.D.R. which by stipulation of the parties is applicable to the tax years in question and which reads as follows:

Allocation of income of public utility, transportation and communications corporations. Net income of these corporations, other than interest, dividends, rents and royalties, which is not specifically assigned by reg. 22.33(1)-7, 22.33(1)-8 and/or 22.33(1)-9 shall be apportioned as follows:

1.          Railroads. Where net income is derived from railroad operations, the part thereof attributable to business within the state shall be that proportion which the trackage owned and operated within the state, bears to the total trackage owned and operated, as reported to the Interstate and Iowa State Commerce Commissions.

2.          Airline, truck and bus line companies, freight car and equipment companies shall determine their Iowa proportion of gross receipts of gross revenues by taking the proportion of mileage traveled in Iowa to the total mileage traveled within and without the state. This provision is applicable to corporations only.

3.          Oil, gasoline, and gas pipeline companies shall determine the proportion of transportation revenue derived from interstate business that is attributable to Iowa by the proportion of Iowa traffic units to total traffic units. The "traffic unit" of an oil pipeline is defined as the transportation of one barrel of oil for a distance of one mile; the "traffic unit" of a gasoline pipeline is defined to be the transportation of one gallon of gasoline for a distance of one mile; and a "traffic unit" of a gas pipeline is defined to be the transportation of 1,000 cubic feet of natural gas or casinghead gas for a distance of one mile.

4.          Telephone and telegraph companies shall determine the Iowa proportion of revenues by taking the Iowa proportion of used wire mileage to the entire used wire mileage of the system.

I-3. Referring to subsection 3 of the regulation, the Protestor argues that it is a "gas pipeline company" engaged in "interstate business" and that revenue from its operations is "transportation revenue." Thus, according to the Protestor, the regulation allows it to apportion income by "traffic units."

I-4. An examination of the Protestor's argument begins with some basic principles of administrative law and rulemaking. Any administrative agency's rulemaking powers are limited to the extent that its rules must be consistent with the law which that agency administers, Des Moines & Central Iowa Railway Co. v. Iowa State Tax Comm'n, 115 N.W.2d 178, 181 (Iowa 1962), and a rule may not be adopted which is at variance with any statutory provision. No rule may "amend or nullify" the intent of the legislature, Bruce Motor Freight v. Lauterbach, 77 N.W.2d 613, 616 (Iowa 1956), and the clear provisions of any statute cannot be altered by administrative rule, no matter how long the rule has existed or been relied upon by the administering authority, Nishnabotna Valley Rural Electric Coop. v. Iowa Power & Light Co., 161 N.W.2d 348, 352 (Iowa 1968).

I-5. Keeping these principles in mind, it must then be determined if the Protestor's interpretation of rule 22.33(1)-10(3) is in harmony or conflict with the law regarding apportionment of income between Iowa and other states. The law of apportionment is contained in section 422.33 of the Code which reads in relevant part:

422.33 Corporate tax imposed. A tax is hereby imposed upon each corporation organized under the laws of this state, and upon every foreign corporation doing business in this state....

I. If the trade or business of the corporation is carried on entirely within the state... the tax shall be imposed on the entire net income, but is such trade or business is carried on partly within and partly without the state... the tax shall be imposed only on the portion of the net income reasonably attributable to the trade or business within the state, said net income attributable to the state to be determined as follows:

...

Where income is derived from business other than the manufacture or sale of tangible personal property, such income shall be specifically allocated or equitably apportioned within and without the state under rules of the director.

Where income is derived from the manufacture or sale of tangible personal property, the part thereof attributable to business within the state shall be in that proportion which the gross sales made within the state bear to the total gross sales.

...

The words "tangible personal property" shall be taken to mean corporeal personal property, such as machinery, tools, implements, goods, wares, and merchandise, and shall not be taken to mean money deposits in banks, shares of stocks, bonds, notes, credits, or evidence of an interest in property and evidences of debt.

II. If any taxpayer believes that the method of allocation and apportionment hereinbefore prescribed, as administered by the director and applied to his business, has operated or will so operate as to subject him to taxation on a greater portion of his net income than is reasonably attributable to business or sources within the state, he shall be entitled to file with the director a statement of his objections and of such alternative method of allocation and apportionment as he believes to be proper under the circumstances with such detail and proof and within such time as the director may reasonably prescribe; and if the director shall conclude that the method of allocation and apportionment thereof employed is in fact inapplicable and inequitable, the director shall redetermine the taxable income by such other method of allocation and apportionment as seems best calculated to assign to the state for taxation the portion of the income reasonably attributable to business and sources within the state, not exceeding, however, the amount which would be arrived at by application of the statutory rules for apportionment.

I-6. The statute directs that business income such as that earned by the Protestor be apportioned in different fashions depending upon the source of that income. If net income is derived from the sale of tangible personal property it is to be apportioned in a ratio which "gross sales made within the state bear to the total gross sales", or by any other method approved by the director, after the taxpayer has petitioned the director for the alternative method and demonstrated that the gross sales method of apportionment is "inapplicable and inequitable." See Moorman Mfg. Co. v. Bair, 254 N.W.2d 737, 739 (Iowa 1977).

I-7. Income derived from business other than the sale of tangible personal property is to be apportioned by rule. It is clear that the legislature intended to treat net income from the sale of tangible personal property differently from net income derived from a source other than the sale of tangible personal property. It is also clear that income derived from the sale of tangible personal property may not be apportioned by rule. Two methods only are allowed: the statutory method of "gross sales" or any other method approved by the director on an individual case-by-case basis.

I-8. Thus, any rule which purports to apportion income derived from the sale of tangible personal property other than by a ratio of gross sales without requiring a petition by each individual taxpayer to the director and the director's approval for change in each individual case would be at variance with the clear requirements of section 422.33, inconsistent with the law and would amend or nullify the intent of the legislature.

I-9. Rule 22.33(1)-10(3) allows apportionment by traffic units without the requirement of individual petition or case-by-case approval. Therefore, if it was intended by the Department or its predecessor, the State Tax Commission, to apply to the sale of tangible personal property, it cannot do so, no matter how long the rule has been in effect or how often it may have been relied upon by the Department or the Commission, Nishnabotna Valley Rural Electric Coop., 161 N.W.2d at 352, Supra.

I-10. To determine whether the Protestor may rely upon the rule and apportion by traffic units, one must now determine whether the Protestor's income was derived from the sale of tangible personal property or from some other source. The Protestor has or takes title to natural gas as the gas enters its pipeline system; either because it has purchased the gas from a producer or because it owns the wells from which the natural gas came. The Protestor transports the natural gas through its pipeline system while retaining title to the gas. As the natural gas leaves the pipeline system, the Protestor surrenders title to and possession of the gas to its customers in return for value received from those customers. When title and possession have been surrendered for a valuable consideration, a sale has occurred under the law of the State of Iowa, Baird v. Webster City, 130 N.W.2d 432, 439 (Iowa 1964).

I-11. A "sale" of the gas has occurred; is gas tangible personal property? Cases dealing with statutes similar to the one involved in this proceeding have held that natural gas is tangible personal property: State Tax Comm'n v. Marcus J. Lawrence Memorial Hosp., 495 P.2d 129, 130 (Ariz. 1972) and Western Oil & Refining Co. v. Verago Oil Corp., 24 P.2d 971, 973 (Cal. 1933). Also, under section 422.33(1)(b), for the purposes of the Iowa corporate income tax law "tangible personal property" is defined to mean "corporeal personal property," and "corporeal property" is, for the purposes of the law, defined to be: "such (property) as affects the senses, and may be seen or handled, as opposed to incorporeal property, which cannot be seen or handled, and exists only in contemplation." Black's Law Dictionary, 412 (4th Ed. 1968). Natural gas affects the senses and can be handled. It is therefore corporeal and thus tangible personal property.

I-12. It would seem that the Protestor's income is thus derived from the sale of tangible personal property and that the Protestor could not utilize rule 22.33(1)-10(3) to apportion income from those sales. However, the Protestor argues otherwise and states that its income from the sale of natural gas is "derived from business other than the ... sale of tangible personal property". Because of this, the Protestor argues that apportionment by rule is permissible under section 422.33(1)(b). The Protestor's arguments are set out in its reply brief on page 5 and will be quoted verbatim:

The fact that Northern sells its gas does not necessarily mean that its income is "derived from" those sales under the statute. Northern's income is directly based on its costs incurred in transporting gas from the source to the point of delivery: each dollar of investment earns a limited amount of income. The mere fact that Northern takes and transfers title to the gas is irrelevant. Northern's income is derived from transportation of the gas, not the sale.

A TV repair shop "sells parts", but one would not conclude that the income of such business is "derived from" the sale. A physician may "sell" drugs, if they are handy in his office, but the mere fact that there is a transfer of title does not mean that his income is derived from the sale. A mere showing that a transaction is a sale because legal title passes does not show that the income is derived from such a sale.

By its regulation providing for apportionment on the basis of traffic units for a gas pipeline, the Department recognized that a company such as Northern derives its income from its service in transporting gas or from its investment in transportation facilities. The term "derived from" should be broadly construed to allow the Department to make regulations for companies whose income is not related to sales.

I-13. The reply brief would appear to contain three basic arguments. First, the Protestor argues that the fact that title passes is "irrelevant" to the fact that the Protestor receives income. However, the Officer reasons that passage of title is not irrelevant in any sense in which that word might be used. Passage is irrelevant neither to the Protestor nor to its customers.

I-14. The transfer of title, or sale, is the event which produces income for the Protestor. If there were no sale of the gas no income would result. The Protestor may transport any amount of gas in the State of Iowa, but no income will result until the gas is sold as well as transported. The one event necessary to earn the income, the passage of title through sale, can hardly be described as "irrelevant" to the earning of the Protestor's income.

I-15. Nor can it be said that passage of title is "irrelevant" because passage of the title is not important to the Protestor's customers, that "in essence" the customers are paying the Protestor for performing a transportation service rather than conducting a sale of the gas. The service of transporting the gas from the fields where it is produced to a location where the customers will use the gas is certainly a useful one, but the fact that the Protestor retains title to the gas while transporting it and surrenders title to the customers at the point of sale is also of use and value to those customers.

I-16. With the transfer of title from the Protestor to the customers, the right of the customers to resell or consume the gas is established, the right to resell or consume property being a right inherent in one who holds title to property 73 C.J.S. Property, sec. 15. The customers must have title before they can consume or resell the gas; thus, the fact that title passes is hardly irrelevant to the Protestor's customers.

I-17. Also, the fact that the Protestor retains title to the gas while transporting it and possesses title at the point the customers receive the gas is of great value to those customers because that circumstance relieves the customers of what for many must be the impossible duty of purchasing gas at or near the point where it is produced and retaining title to the gas while it is shipped to Iowa. It could not really be stated that the villages of Cascade, Coon Rapids or Osage could send agents to Texas, Oklahoma or some other natural gas producing state and purchase gas for their use there.

I-18. In summary, the sale of gas is so closely associated with the income of the Protestor and so necessary to the Protestor's customers that it cannot be said that the passage of title and sale resulting from that passage is "irrelevant" to the income earned by the Protestor from the sale of its natural gas.

I-19. The Protestor next argues that its income is derived from something other than the sale of tangible personal property because of the following circumstances: transportation expenses are the major expenses which must be recovered if the Protestor is to realize a profit. The rates which the Protestor may charge and the net income which it receives are determined by F.E.R.C. The rates which that regulatory agency allows are based on expenses, the greater the expenses the greater the rate and allowable net income. Thus, net income fluctuates in a direct cause and effect pattern as expenses fluctuate. Because net income is directly related to expenses, in a way it would not be if income were determined by the law of supply and demand, the Protestor's income is "derived from" the major expense of transportation.

I-20. The Officer does not find this argument acceptable. It is true that expenses limit the Protestor's net income; however, the fact that the expenses limit the income does not mean that the income is derived from the expenses. If the income were "derived from" the expenses, that is, if the expenses caused the income, it would be logical to assume that as the expenses accumulated income would also. But that is not the case. The Protestor may accumulate a vast amount of expenses and not realize any income whatsoever. The only event which causes or generates income is the sale of tangible personal property. Therefore, it is from the Protestor's sales and not its transportation expenses that its income is derived. And, if one argues that the net income is "derived from" expenses, one cannot forget the expense involved in the purchase of the gas which, though less than the transportation expense, is still considerable. If one argues that income is derived from expenses, one cannot state that income is derived only from the predominant or major expense. Other expenses obviously contribute to income as well. Some of the difficulties involved in stating that income is derived only from the major expense are set out in the following examination of the Protestor's third argument in its reply brief.

I-21. With its mention of the TV repair shop and the doctor selling drugs, the Protestor seems to be using an argument similar to one found mainly in the area of sales tax. The argument is used when the law of a state levies sales tax on the sale of tangible personal property but not on the sale of services. The argument is that the major expense connected with the sale of an article of tangible personal property is a service, and because the major expense involves a service, a service is "in essence" being provided when the property is sold, and no sales tax should be levied on the sale. The argument, when presented to the courts, has been rejected with near unanimity: see Voss v. Gray, 298 N.W. 1 (N.D. 1941)and Cusick v. Comm'n, 84 S.W.2d 14 (Ky. 1935),

Accord Mt. Mansfield Television Inc. v. Comm'r, 336 A.2d 193 (Vt. 1975) and American Television Inc. v. Hervey, 490 S.W.2d 796 (Ark. 1973). It has been stated that accepting this argument would for all practical purposes do away with sales tax because the cost of a service or services is almost always the predominant expense involved in the sale of tangible personal property, see Crescent Amusement Co. v. Carson, 213 S.W.2d 27, 29 (Tenn. 1948).

I-22. The Protestor argues in similar fashion that income from the sale of its tangible personal property is really income derived from a transportation service because transportation is the predominant expense involved in sale. To accept this argument would have an effect upon the corporate income tax parallel to that which the court in Crescent stated it would have upon the sales tax. It would not "destroy" the corporate income tax but it would render the requirement that income from the sale of tangible personal property be apportioned by a gross sales formula a nullity. So long as the predominant expense involved in the sale of an article of tangible personal property was a service, net income derived from the sale of that property could be apportioned by rule. As suggested by the court in Crescent Amusement, this could be done with almost any article of tangible personal property.

I-23. The proceeding discussion demonstrates that the Protestor is in the business of selling tangible personal property. Because of this, one must conclude that if the Department, or its predecessor, the Commission, ever intended to include the Protestor's net income in the phrase "transportation revenue" that it went beyond the authority delegated to it by the legislature in so doing. Rule 22.33(1)-10(3) cannot be used to apportion income from tangible personal property.

I-24. The consequence is that the rule, insofar as its operation exceeds the authority granted to the Department, is void, Motor Club of Iowa v. Department of Transportation, 251 N.W.2d 510, 518 (Iowa 1977) and cases cited therein. A void rule has no legal or binding effect and is unable in law to "support the purpose for which it was intended." Emerson Electric Co. v. City of Ferguson, 376 S.W.2d 643, 649 (Mo. App. Ct. 1964). Since the rule, as interpreted by the Protestor, is without legal effect it may not be relied upon by even the Protestor for whose benefit it was allegedly intended.

I-25. However, rule 22.33(1)-10(3) need not be interpreted so as to render it a legal nullity. The words "transportation revenue" can be held to mean revenue derived from the service of transporting natural gas title to which is held by a person other than the transporter. When so interpreted, the rule is lawful, since it apportions income derived from a service and a source other than the sale of tangible personal property. The principles governing the construction and interpretation of statutes are applicable to the interpretation of administrative rules, Motor Club of Iowa, Supra. at 518. Limiting the words "transportation revenue" to exclude the Protestor's income renders the rule lawful and effective. Such an interpretation ought to be adopted in preference to an interpretation which renders the rule unlawful and void, as an interpretation of the statute which renders a statute valid is preferred to one which does not, 82 C.J.S. Statutes, section 323, p. 605 fn. 88.

I-26. Additionally, the meaning of words and phrases within a statute may be determined by reference to the meaning of associated words and phrases, State v. Bauer, 20 N.W.2d 431, 432 (Iowa 1945).This well-known standard of statutory construction is referred to as the rule of Noscitur A Sociis, which is based on the assumption that if language used in the statute clearly indicates that the legislature was thinking only of one class of persons or objects when it promulgated the statute, any words within the statute should be defined to embrace only that class. 2A Sutherland, Statutes and Statutory Construction, (Sand's 3d Ed., sec. 47.16).

I-27. A study of rule 22.33(1)-10 indicates that those who wrote it intended only that the rule embrace that class of taxpayers which carry goods owned by others for hire or which carry passengers for hire, and did not include persons who transport their own goods for later sale to others. This is clear because sections (1) and (2) of the rule refer to railroads, airlines, truck lines and bus lines, organizations which provide a transportation service but which do not hold title to the goods which they transport. The obvious intent of those who issued the regulation can be fulfilled if "transportation revenue" is defined in section (3) of the rule as it is defined in sections (1) and (2) that is revenue derived from the service of transportation only.

I-28. Several of the Protestor's additional arguments to the contrary must now be examined. The Protestor suggests that "transportation revenue" cannot refer to transport of gas for hire because natural gas pipeline companies which transport gas for hire are almost non-existent. The Protestor argues that common carriers of natural gas are completely non-existent and carriers of natural gas other than common carriers are so few that the rule would, for all practical purposes, be useless if the term "transportation revenue" is confined only to revenue derived from carriage of gas.

I-29. The Officer begins by noting that the law recognizes two types of carriers for hire: the common carrier which transports, for hire, the property of any member of the general public who chooses to employ it, Bookhart v. Green lease-Lied Motor Co., 244 N.W. 721, 724 (Iowa 1932) and "contract carriers" which transport goods not for the general public but only for a limited number of shippers, usually shippers with particular or unique needs, Costello v. Smith, 179 F.2d 715, 718 (Ct. of App. 2d Cir. 1950).

I-30. When the term "transportation revenue" is limited to revenue derived from carriage of natural gas for hire, the term is as applicable to revenue derived from contract carriage as it is to revenue derived from common carriage. The Protestor is a contract carrier of natural gas. Thus, the rule may be used to apportion a certain amount of its income, even though the revenue which the Protestor derived from the carriage of natural gas during the years 1962 through 1972 was small in comparison to its total revenue. Because the Protestor itself may use the rule to apportion a certain amount of its income, it can hardly argue that the rule serves no purpose whatsoever if the term "transportation revenue" is limited to revenue from carriage for hire.

I-31. Furthermore, the concept of both common carrier and contract carrier natural gas pipelines would seem to be well known in the law: Tex. Code Ann. Tit. 102, sec. 6050(2) (Vernon) defines a "gas utility" to be a company which owns, operates or manages a "pipeline for the transportation or carriage of natural gas, whether for public hire or not." Under the law of Oklahoma, 52 Okla. Stat. Ann. sec. 24, "every corporation ... or other person, now or hereafter engaged in the business of carrying or transporting natural gas for hire... by pipeline... shall be a common carrier thereof as at common law..." The law of Alaska defines gas to include "natural gas", Alaska Stat. sec. 42.06.630(4). The law of that state further defines "pipeline" to mean a "total system of pipe" used for "transportation, for hire and as a common carrier, of oil or gas for delivery, storage, or further transportation". Alaska Stat. sec. 42.06.630(9). The Nevada revised statutes, in section 704.030(2) speak of "corporations, companies, individuals or associations of individuals engaged in the production and sale of natural gas, other than sales to the public, or engaged in the transmission thereof other than as a common carrier transmission distribution line or system." Finally, federal law in 15 U.S. C. A. 717(a)(6) defines a "natural gas company" to mean "a person engaged in the transportation of natural gas in interstate commerce, or the sale in interstate commerce of such gas for resale."

I-32. In summary, when the words "transportation revenue" are held to be limited to revenue derived from contract and carriage of natural gas, they refer to entities well known to the law, contract and common carrier natural gas pipelines. Additionally, the rule as interpreted may be utilized by the Protestor to apportion a certain amount of its income. Under these circumstances, it cannot be held that the rule as interpreted is a useless nullity.

I-33. The Protestor also argues that its interpretation of the words "transportation revenue" ought to be accepted because the ambiquity in a statute or regulation imposing a tax should be construed strictly against the state and in favor of the taxpayer, and any ambiquity in a regulation or statute should be strictly construed against the drafter which was in this case the Department. The Protestor quotes two well-known standards of statutory construction applicable to regulations. However, no particular rule of statutory construction should be followed if to do so would lead to an irrational or illogical conclusion, 82 C.J.S. Statutes, sec. 311, pp. 528-29. Construing of the phrase "transportation revenue" as the Protestor wishes it construed is a construction which would render the regulation unlawful, therefore void, therefore of no use to anyone including the Protestor. To state these circumstances is to demonstrate that to use the Protestor's standards of construction is illogical; thus, they should not be employed in determining the meaning of "transportation revenue."

I-34. The Protestor also argues that it ought to be allowed to apportion its income by traffic units because the traffic units formula is a better apportionment formula than are gross sales under the "source" and "benefits" test. Described very basically, the source test holds that the greater portion of a taxpayer's net income ought to be taxed by the state which is the source of that income, and the benefits test holds that the greater portion of a taxpayer's net income ought to be taxed by the state which confers the greatest number of "benefits" upon that taxpayer necessary for the taxpayer to earn its net income. The Officer will not discuss these tests extensively. It suffices to say that the Protestor has not proved what the source of its income is and has submitted no proof regarding the "benefits" which Iowa or any other state has conferred upon it. The evidence indicates that the Protestor has two major expenses, transportation expenses and the expense of purchasing natural gas. Its argument would seem to be that because transportation expenses are its major expense, that its income is derived from the transportation expenses, and therefore the income ought to be apportioned by traffic units. The mere fact that the Protestor's major expenses are transportation expenses does not, under the standards of cost accounting as this Officer comprehends them, mean that transportation is the major source of the Protestor's net income. One facet of a taxpayer's operation may generate large expense and little net income, another facet of it may generate few expenses but a great amount of net income. Because there is no proof that the major expenses have generated the major portion of the taxpayer's income, there is no proof that the greater portion of the Protestor's income is derived from transportation, and no proof that a traffic units formula is a better formula for apportionment that income than gross sales. As regards the "benefits test," the Protestor has not shown that the benefits conferred by the State of Iowa when compared with the benefits conferred by other states are such that a gross sales formula distorts the amount of net income attributable to Iowa. There is no breakdown of benefits conferred by states at all.

I-35. In its arguments regarding the source and benefits test, the Protestor has attempted to do what the taxpayer did in the case of Moorman Mfg. Co. v. Bair. The Protestor has stated a few general standards regarding the apportionment of income and mentioned a few hypothetical circumstances in which those general standards are applicable. However, there has been no attempt to apply the general standards to the specific circumstances of this case. The use of general standards without specific applications to the facts of the case to "prove" the unfairness of the gross sales formula was rejected by the Iowa Supreme Court in Moorman Mfg. It must be rejected in this case as well. The quality of the evidence necessary to prove that a formula other than gross sales should be used is set out in Moorman as follows:

Hence, it is not necessary that the state demonstrate its use of the single-factor formula has resulted in an exact measure of value. However, when a taxpayer comes forward with strong evidence tending to prove the formula employed will yield a grossly distorted result in this particular case, the state is obligated to counter that evidence to make the accommodation necessary to assure that its taxing power is confined to its Constitutional limits. Moorman Mfg. Co. v. Bair, 254 N.W.2d 737, 745 (Iowa 1977), aff'd 98 S. C. 2340 (1978).

The Protestor has not presented any evidence let alone strong evidence that the gross sales formula grossly distorts the income which it earned within Iowa during the years 1962 through 1972.

I-36. The Protestor also presents additional arguments regarding use of traffic units in the property tax area, the traditional use of apportionment methods other than gross sales by public utilities and arguments regarding constitutional difficulties with the single sales factor formula. However, these arguments are not developed in any great degree; no evidence is presented regarding them, and the Officer will not consider them further.

I-37. In summary, the Protestor is required by law to apportion its income by the gross sales formula during the years in question.

DIVISION II

Is the Department estopped by its own action from asserting its legal right to demand that the Protestor apportion its income by the gross sales formula during the years 1962 through 1972?

II-1. The Protestor asserts that the Department is estopped to deny it the right to use a traffic units formula. To pursue that assertion, one must first clearly state the elements of estoppel and the consequences to an estopped party when an estoppel arises. For the purposes of the law of Iowa, estoppel is: 1) a false representation or concealment of material fact made by a party, 2) the representation or concealment must be made to a person who has no knowledge of the facts which are known to the party who made the false representation or concealment, 3) the party to whom the representation or concealment is made must rely upon the false representation or concealment to his or her prejudice or injury, Walters v. Walters, 203 N.W.2d 376, 379 (Iowa 1973). The consequence of the party estopped is that that party may not state that the facts are other than what he or she has falsely represented those facts to be.

II-2. The Protestor argues that the Department, for eleven years, acquiesced in its use of a traffic units formula to apportion its income, and this acquiescence falsely represented the state of the law. The Protestor further argues that it did not know the true state of the law. The Protestor relied upon the Department's acquiescence in its continued use of the traffic units formula; that reliance was to its injury. Consequently, the Department may not now state that the Protestor is not entitled to use the formula.

II-3. A threshold question regarding whether the Protestor has relied to is "prejudice or injury" upon the Department's alleged representations arises. The Iowa Supreme Court has stated that it may be willing to apply the doctrine of estoppel when "a later determination of tax liability which contradicts a previous opinion compels the taxpayer to pay from his own funds a tax he would have collected from others except for the erroneous representation." S & M Finance Co. of Fort Dodge v. Iowa State Tax Comm'n., 162 N.W.2d 505, 510 (Iowa 1968) and Iowa Movers and Warehousemens Ass'n v. Briggs, 237 N.W.2d 759, 765- 66 (Iowa 1976). The Protestor argues that had it paid the assessed tax in the years when that tax was due, it could have passed the increased cost of that tax on to its customers, but that it cannot now recover the amount of the assessment from its customers because F.E.R.C. regulations prohibit the Protestor from passing on a one-time expense such as this assessment to its customers.

II-4. The Officer can only state that he has diligently searched the Code of Federal Regulations and is unable to find the regulation to which the Protestor refers. Furthermore, the F.E.R.C. would appear to allow a natural gas pipeline company to list as part of its justification for a rate increase state income taxes paid in current or previous years. The regulation which allows this does not state that such taxes are excluded from expenses justifying an increase by virtue of the fact that they are paid as a result of a special assessment. The regulation referred to is found in Federal Energy Regulatory Commission, 18 C.F.R. sec. 154.63(f) Schedule H (3)-5.

II-5. However, the Officer may be mistaken. The regulations are complex and he may have simply overlooked the regulation to which the Protestor refers. The Officer therefore reasons that even if the tax is one to which the doctrine of estoppel is applicable, the doctrine cannot be applied under the particular circumstances of this case. The Protestor argues essentially that it relied upon the silence of the Department in his use of the traffic units formula, that is, that it rationally concluded from the Department's eleven years of silence that traffic units was an apportionment method suitable to the Department. Estoppel can arise as a result of silence if a party is under a duty to speak out and fails to do so, and another party justifiably and detrimentally relies upon the silence in the performance of a certain act, First Nat. Bank v. Power Equipment Co., 233 N.W. 103, 105 (Iowa 1930); however, one cannot claim estoppel based on silence if he or she has actual knowledge of the facts or a ready means of acquiring knowledge of the facts, 31 C.J.S. Estoppel, sec. 87. Here, the Protestor had several "ready means" of learning whether the Department's silence actually meant approval of its apportionment method. Department rules have long been in effect which allow taxpayers to secure written opinions on taxation issues from the Department or its predecessor, the Commission, Iowa Movers and Warehousemens Ass'n., Supra at 762 and 766. The Protestor also could have filed a return using the sales apportionment method and then filed a claim for refund using the traffic units method or it could have petitioned the Director or Commission to use the traffic units method. Because of these circumstances, the Protestor cannot claim that the Department is estopped by its silence.

II-6. Furthermore, a particular standard of evidence is necessary to prove estoppel. Regarding evidence "the burden to prove and establish estoppel is on the party asserting it, with strict proof of all the elements being demanded." Paveglio v. Firestone Tire & Rubber Co., 167 N.W.2d 636, 639 (Iowa 1969). The Protestor has not presented any evidence to prove that the Department intentionally remained silent and intentionally mislead the Protestor into believing that traffic units was a suitable formula for apportionment. Since the Protestor has not proved intentional conduct, this leaves negligent conduct only as a basis for estoppel. Negligent conduct may give rise to an estoppel, Monona County v. Gray, 206 N.W. 26, 29 (Iowa 1925), but the general rule is that the negligence must be of a gross or culpable sort, 31 C.J.S. Estoppel sec. 69(a) fn. 17.5. That general rule is the law of Iowa. It was stated in S & M Finance Co., Supra at 511 that "mere negligence or lack of diligence" on the part of a state agency would not give rise to an estoppel. At best, the Protestor's evidence shows mere negligence or lack of diligence and not gross or culpable negligence on the Department's part. It is mentioned in several places on the Protestor's tax returns that it is in the business of selling natural gas. However, the failure to realize that sale of natural gas could not be apportioned by traffic units and the failure to realize that the Protestor had not been granted an exception from the gross sales formula seems to the Hearing Officer to be a mistake which even a conscientious Department employee could make. Because the Protestor has not proved that the Department's silence was a result of gross or culpable negligence on the Department's part, that silence cannot serve as the basis for an estoppel.

II-7. Additionally, estoppel can never arise in favor of a party whose own contributory negligence has given rise to the situation relied upon to establish the estoppel. 31 C.J.S. Estoppel, sec. 80. Did the Protestor's own contributory negligence contribute to the situation? The Officer believes that it did. It is the duty of all persons to know the law, Priest v. Whitney Loan & Trust Co., 261 N.W. 374, 378 (Iowa 1935). The Protestor failed to fulfill that duty without just cause, and its failure to know the law without just cause establishes its negligence. It is not too much to expect a Protestor which is a corporation and can employ competent legal counsel to be aware through its agents of the provisions of section 422.33 which are rather straightforward. Because of its own contributory negligence, the Protestor may not claim estoppel.

II-8. Estoppel is resorted to only when manifest injustice would result if the doctrine were not applied, Iowa Movers, Supra at 765. Because this entire unfortunate circumstance resulted from the negligence of both parties "manifest injustice" will not result if the doctrine is not applied, and the doctrine will not be applied.

II-9. Also, it is the established law of the State of Iowa that no estoppel against the state or any of its governmental subdivisions can exist because of the unlawful acts of government employees: "....it seems to be well settled in our decisions that estoppel ... will not lie against the governmental unit because of ... acts of its officers which were without legal authority", Independent School Dist. v. Samuelson, 270 N.W. 434, 436-37 (Iowa 1936). See also Mitchell County v. Odden, 259 N.W. 774, 780 (Iowa 1935), Cedar Rapids Water Co. v. City of Cedar Rapids, 90 N.W. 746, 749 (Iowa 1902) and McGillivray v. Dist. T.P. of Barton, 65 N.W. 974, 975-76 (Iowa 1896). The discussion in Division I clearly illustrates that the Department had no legal authority to authorize the Protestor to utilize a traffic units formula. Therefore, even if its silence could be taken as authorization to use the formula, the silence does not estop the Department.

II-10. Finally, if the silence is taken as approval, the silence did constitute an erroneous opinion regarding the state of the law. No case would appear to have ever arisen in the State of Iowa regarding the point; however, it would seem to be the rule in other jurisdictions that the state cannot be estopped by an erroneous opinion of law issue by one of its employees, see 31 C.J.S. Estoppel, sec. 142, p. 709, fn. 23 and cases cited therein. For all the reasons previously mentioned, the Officer concludes that the Department is not estopped to deny the Protestor the use of a traffic units formula for the years 1962 through 1972.

DIVISION III

Did Northern Natural for its tax years 1969 through 1972, inclusive, and Northern Propane, for its tax years 1971 through 1974, inclusive, properly determine on their Iowa corporate tax returns their federal income tax deductions authorized by section 422.35(4), Code of Iowa?

III-1. The statute relevent to this proceeding, section 422.35(4), The Code 1979, reads in relevant part:

Net income of corporations-how computed. The term "net income" means the taxable income ... as properly computed for federal income tax purposes under the Internal Revenue Code of 1954, with the following adjustments: ....

(4) Subtract fifty percent of the federal income tax paid or accrued, as the case may be, during the tax year, adjusted by any federal income tax refund; and add the Iowa income tax deducted in computing said taxable income.

The word "paid" in section 422.35(4) is defined by section 422.4(7) of the Code to mean "paid or incurred."

III-2. Northern Natural is the parent of a group of subsidiary corporations. Northern Propane is one of those subsidiaries. Because both Protestors are part of a consolidated group of corporations, they and other members of their consolidated group may file a federal corporate consolidated income tax return. The procedure for filing and paying the consolidated federal tax is as follows: each corporation computes the tax which would be due if it were a separate entity rather than a member of a consolidated group. Northern Natural's subsidiary corporations then forward to it a sum of money equal to the amount of tax which each subsidiary would be required to pay if it were a separate corporation rather than a member of the consolidated group. The consolidated return is then prepared, and Northern Natural forwards the amount of tax due from the corporations filing as a consolidated group to the Federal Government. During the tax years in question, the amount due from the corporations on the consolidated return was less than the amount due if each corporation had filed as a separate entity and their separate tax liabilities were added together. This circumstance existed because certain of the subsidiary corporations in Northern Natural's consolidated group incurred losses. Those subsidiary corporations which incurred losses were paid a sum of money equal to the amount by which their losses reduced the federal income tax liability on the consolidated corporate tax return. The Protestors argue that for the purposes of section 422.35(4) "federal income tax paid or accrued" is the amount calculated by Northern Natural and Northern Propane to be due and owing if they had filed separate returns and forwarded the amounts due on those returns to the Federal Government. The Department argues that the federal tax deduction is limited to fifty percent of an amount based upon the tax shown to be due and owing on the consolidated federal return and calculated without regard to the sums paid to the loss subsidiaries by use of an "income producer's formula."

III-3. If the Protestors are to prevail, they must show that sums paid to subsidiaries suffering losses represents "tax paid (incurred) or accrued."

III-4. Tax has been defined to be "... annual compensation paid to government for annual protection and for the current support of government,"

Alabama Power Co. v. Federal Power Comm'n. 134 F.2d 602, 608 (5th Cir. 1943), Accord In Re Schurtz's Will, 46 N.W.2d 559, 562 (Iowa 1951). A tax has "accrued" for the purposes of making it a deductible item "in the year when all events have occurred which fix the amount of tax and determine the liability of the taxpayer to pay it." Van Norman Co. v. Welch, 141 F.2d 99, 103 (1st Cir. 1944) and cases cited therein. The word "incurred" refers to a liability which is thrust upon a person by an act or operation of law, therefore, a debt is "incurred" when a legal obligation to pay it exists, Irby v. Government Employees Insurance Co., 175 S.2d 9, 10 (La. App. 1965), and a tax is "paid" "when the amount thereof is received by the proper official in cash or its equivalent." Stelter v. Calvert, 456 S.W.2d 202, 203 (Ct. App. Tex. 1970)and cases cited therein.

III-5. Also, to resolve the issues raised by this case, one must understand the liabilities which exist and do not exist when a group of affiliated corporations files a consolidated federal income tax return. Consulting the relevant statutes and rules, see I.R.C. sec. 1501 et. sec. and I.R.S. regs. sec. 1.1502, it is clear that if an affiliated group of corporations files a consolidated return and the parent company pays the tax shown to be due on the consolidated return, there is no obligation on the part of any one member of the group either to file a separate return or to pay the tax which would be due and owing if a separate return were filed. Members of the group may agree among themselves as to how the tax shown to be due on the consolidated return shall be paid. However, the members may not limit by their own agreement the liability of any one member of the group if tax remains unpaid and a deficiency exists.

III-6. Given these circumstances, the Officer cannot accept the Protestors' argument that the sums transferred from the Protestors to subsidiaries which have sustained a loss are "taxes paid (incurred) or accrued." The sums involved have never been forwarded to the government; therefore, they fail to meet the definition of a "tax." They have never been paid to any government official in cash or its equivalent; no legal obligation to pay the government these sums has ever existed, therefore, the sums do not represent tax paid, accrued or incurred. They are simply sums of money voluntary paid from one private organization to another.

III-7. The Officer's reasoning is in harmony with a number of cases from other states regarding similar statutes. The courts of those states held that payments from profitable subsidiaries to subsidiaries suffering losses through the parent corporation were not the payment of a tax when the payments were made by way of separately computed federal income tax liability, and the group filed a consolidated return. See Continental Telephone Co. v. State Tax Comm'n. of Utah, 539 P.2d 447 (Utah 1975), Western Grain Co. v. Alabama, 318 S.2d 719, aff'd 318 S.2d 722, (Ala. 1975) and Trunkline Gas Co. v. Collector of Revenue, 182 S.2d 674 aff'd 184 S.2d 25 (La. 1966). The Officer is aware of only one case involving the question of whether the parent company's share of the payments to loss subsidiaries is deductible as federal tax paid. That case involves the Protestor and was decided adversely to it, Northern Natural Gas Co. v. Comm'n of Revenue, 251 N.W.2d 125 (Minn. 1977).

III-8. A contrary holding on similar facts in a statute very similar to Iowa's was reached by the Supreme Court in the state of Kansas in the case of Cities Service Gas Co. v. McDonald, 466 P.2d 277 (Kan. 1970). The Officer refuses to adopt the court's reasoning in that case due to a number of circumstances. At least part of the reason for the court's holding was the fact that the Kansas Department of Revenue had, for a long period, acquiesced in and made no protest to the taxpayer's practice of computing the federal deduction on a separate filing basis. Circumstances are different in this case. The Iowa Department of Revenue did not acquiesce in the determination of its own Board of Tax Review which adopted the Kansas Supreme Court's reasoning in the case of Massey Ferguson Credit Corp. v. Briggs, Docket No. 48 (1974).

III-9. Additionally, the court stated, Cities Service at page 283 that the taxpayer had "incurred" an obligation to pay the amount of tax owing if a return were separately filed. The court does not set out in the decision its definition of the word "incurred." The Officer reasons that this definition must be an unusual one because the court made no finding that the taxpayer was legally obligated to pay to the federal government the amount of tax owing on a separately filed return. Whatever the court's definition of the word might be, the Officer declines to adopt it in view of the court's failure to set out the manner in which it arrived at that definition. Additionally, the court in the Cities Service case at page 282 seems to be saying that the entire amount of money transferred from the subsidiary to the parent corporation was "tax paid" because a portion of the sum reflected the portion of the tax due and owing on the combined return which the subsidiary's net income generated and the rest of the sum transferred resulted, in a one-to-one ratio, in less of a refund from the Federal Government to the parent company. This is certainly a highly unusual definition of the word "paid" which as previously mentioned, usually means the discharge of a legal obligation by transfer in money or money's worth. The term is not usually applied to a sum of money the transfer of which does not satisfy the transferor's debt to the transferee but which prevents the transferee from receiving money which it would otherwise receive from a third party. Finally, the Kansas Supreme Court's reasoning in the Cities Service case has been criticized by nearly every court which has subsequently considered it, e.g., see Northern Natural Gasat page 130.

III-10. One case in which the reasoning was not criticized is Department of Revenue v. TransAmerica Title Insurance Co., C.C.H. Ariz. Tax Reports para. 200-388 (C. A. Ariz. 1979). The Officer refuses to adopt the reasoning found in that case. In concluding that the federal tax deduction could be based upon tax due as if returns were separately filed the court relied heavily on the fact that the Arizona Department of Revenue had promulgated no rules regarding the proper method of computing the federal tax deduction. According to the Protestor, prior to 1974, the applicable Department rule allowed corporations to deduct federal tax paid, incurred or accrued by any method which was "fair and equitable." The Protestor's contention would appear to be correct. See rule 22.35-2, 1973 I.D.R.

III-11. However, the Officer believes that the provisions of Iowa law are clear to the point that they prohibit the use of the Protestor's method of computing the federal tax deduction and no rule is necessary to elucidate the law's provisions. Under these circumstances, the failure of the Department to promulgate a rule regarding the federal tax deduction prior to 1974 does not prevent it from requiring the Protestor to use its method of computing the deduction. Additionally, the Arizona Appellate Court seems to state that either the Department's method of computing the deduction or that of the taxpayer was a fair and equitable one, and that in these circumstances, it was inclined to accept the taxpayer's method of computation. Such a determination fails to take into account the fact that in the event of doubt or ambiquity regarding the meaning of the statute which authorizes a deduction, that doubtful meaning or ambiquity must be resolved against the person claiming the deduction and in favor of the taxing authority, In Re Estate of Washington, 201 N.W.2d 77, 79 (Iowa 1972)and cases cited therein. It follows then that if a statute arguably and rationally allows two methods of computing a deduction, that method most favorable to the state rather than the method most favorable to the taxpayer ought to be adopted.

III-12. The Protestor also cites the case of Columbia Gulf Transmission Co., F.E.R.C. Op. no. 47 (1979). In that case, the Federal Energy Regulatory Commission stated that it was proper for a subsidiary of a natural gas pipeline company to claim as federal tax paid the tax due if the subsidiary were filing a separate return, even though the subsidiary and the parent were filing a consolidated return. The case is not a tax case. The question was the amount of tax which could be stated for the purpose of justifying a rate increase. A major reason for the decision was the fact that allowing the larger amount of tax expense would encourage exploration for natural gas (Op. no. 47, p. 13). The Commission's reasoning might be useful when it is applicable only to companies which produce fuel of one sort or another. However, were the Officer to adopt the Commission's reasoning, it would be necessary to make that reasoning applicable to all corporations which do business and pay tax in Iowa. The Commission policy would be beneficial to only a small number of fuel-producing corporations but it would be necessary to apply it to every one, and a great deal of revenue would be lost in the process. Because of this, the Officer declines to adopt the Commission's reasoning.

III-13. In its brief and reply brief, the Protestor sets out certain hypothetical situations which, in its estimation, demonstrate that its method of computing the federal tax deduction is more fair and equitable than that of the Department. In essence, the Protestor's method of computing the deduction allows subsidiary corporations to carry over losses from one year to another while the Department's does not, and this, in the Protestor's estimation, makes this method of computing the deduction a more fair and equitable one. The Officer knows of no case in which a carryover provision from year to year has been read into a statute; nor is he aware of any case in which it is stated that an interpretation of a statute which did not incorporate a carryover provision into the statute was deemed to be unfair or inequitable. The Officer will not be the first to state that carryover provisions must be read into the law. Additionally, the Department's point that deductions must be confined to the tax year in which they arise is well taken.

III-14. Finally, the Protestors argue that under an accounting definition of the term "taxes paid, incurred or accrued" such has occurred when payment has been made to the loss subsidiaries. Regarding this argument, it suffices to say that this accounting definition is in conflict with the common definition of "taxes paid, incurred or accrued" and it is assumed that the legislature intended that the common definition of a term be used in a statute unless there is clear evidence that another meaning for the statutory terms was intended, Sorge v. Iowa Department of Revenue, 269 N.W.2d 129, 132 (Iowa 1978) and cases cited therein. That is not the case here. Therefore, the common definitions of the terms in question must be used.

III-15. In conclusion, Northern Natural, for its tax years 1969 through 1972, and Northern Propane, for its tax years 1971 through 1974, did not properly determine on their Iowa corporate tax returns their federal income tax deductions. Tax was properly assessed against them for their failure to use the Department's "income producer" formula.

THEREFORE, in light of the above-mentioned facts, law and reasoning, it is reasonable to find that the Department did not err in its assessment of additional corporate income tax due and owing against the Protestors, Northern Natural and Northern Propane.

With respect to the record developed by the parties, it is the belief of this Hearing Officer that the evidence is more than substantial to support a factual and legal conclusion that the Department's assessment was proper.

No affidavit has been filed by the Protestors under rule 730-7.19(17A) IAC justifying deletion of any information contained in the record prior to public inspection. The record is thus completely open to public inspection in accordance with sections 17A.3(a)(d), 68A.2 and 68A.7, The Code 1979.

Pursuant to section 17A.15(3), The Code 1979, this Hearing Officer's proposed decision becomes the final decision of the Department of Revenue without further proceedings unless there is an appeal to, or review on motion of, the Department within thirty (30) days of its issuance.

Done at Des Moines, Iowa this 18th day of January, 1980.

IOWA DEPARTMENT OF REVENUE

Darwin D. Clupper Hearing Officer