From the Circuit Court of Cole County; Civil Appeal; Judge James F. McHenry.
The opinion of the court was delivered by: Welliver
The issue in this case is whether long-term capital gains income of respondent International Telephone & Telegraph Corporation (ITT) from the divestiture of four ITT subsidiaries pursuant to a consent decree constitutes "business income" or "nonbusiness income" for purposes of income allocation and apportionment pursuant to § 32.200, art. IV, RSMo 1969. *fn1
ITT is a Delaware corporation authorized to do business in Missouri. The original ITT parent corporation and its direct subsidiaries engaged in the manufacture and sale of electronics and telecommunications equipment and other goods. Among its products are switching systems, private telephone and telegraph exchanges, answering and recording equipment, microwave radio systems, mobile communications equipment, and industrial heating and ventilation equipment. ITT now operates in more than sixty countries and employs approximately 400,000 persons.
ITT conducts business in Missouri primarily through its Blackburn Division in St. Louis, which manufactures and sells electrical connectors, grounding devices, and other electrical hardware for electrical utilities and contractors.
During the 1960's ITT instituted a corporate acquisition program in order to complement its existing business structure through diversification, stabilization of profits, and maintenance of a high level of profits for the ITT group as a whole. By 1977 ITT had approximately 1,000 subsidiaries, 400 of which were in the United States. The corporations that ITT acquired engaged in five general areas of business: telecommunications, engineered products, consumer products, natural resources, and insurance and finance. Each subsidiary operated independently of ITT, although for a fee, which ITT reported as income, ITT performed accounting, tax, and other services for some of the smaller subsidiaries. Employees of ITT sat on the boards of directors of some of the subsidiaries, but there were no interlocking directorates among corporations in the ITT group.
ITT's acquisition of the Hartford Fire Insurance Company in 1970 resulted in an antitrust suit against ITT by the United States Department of Justice. The suit was settled in 1971 with the entry of a consent decree by which ITT agreed to a scheduled divestiture of several of its subsidiaries in return for dismissal of the antitrust action. ITT settled the suit in order to prevent protracted and costly litigation, assure certainty in the retention of corporate acquisitions, avoid adverse publicity, and eliminate problems with the Department of Justice.
Pursuant to the consent decree ITT sold its stock in Avis Company and Hamilton Life Insurance Company in 1972 and its stock in Avis Corporation and Canteen Corporation in 1973. Those sales produced long-term capital gains for ITT, income that ITT's accountants treated as "extraordinary" because it was not related to the corporation's regular business income. Consequently, ITT treated the income as "nonbusiness income" on its Missouri income tax returns for 1972 and 1973. "Nonbusiness income" is taxable only in the state of the taxpayer's commercial domicile, the principal place from which its business is managed, and in this instance the capital gains would not be taxable in Missouri because ITT's commercial domicile is New York. See § 32.200, art. IV, §§ 1(1)-(2), -(5); 6(3). ITT included the gains from the divestiture on its New York franchise tax return.
The Department of Revenue audited ITT's Missouri income tax returns for 1972 and 1973 and, on the basis of those audits, assessed against ITT additional income tax and interest of $16,876.47 for 1972 and $63,735.79 for 1973, an aggregate of $80,612.26. ITT petitioned for a formal hearing, after which the Director of Revenue affirmed the assessment. The Director reasoned that corporate growth is a basic business purpose, that the acquisition and management of subsidiaries was a regular part of ITT's business, and that as a result the income in question was earned in the regular course of ITT's business.
The State Tax Commission reversed the Director and held that the disputed income was not taxable in Missouri because it "did not arise from a transaction in the regular course of [ITT's] trade or business." The Director appealed the Commission's decision to the circuit court, which affirmed the Commission on the ground that its decision was supported by competent and substantial evidence upon the whole record. See § 536.140(2)(3), RSMo 1978. From that decision the Director appeals. We have jurisdiction because the case involves construction of the Missouri revenue laws. Mo. Const. art. V, § 3. We affirm.
"Business income" for purposes of income apportionment under § 32.200 is defined as "income arising from transactions and activity in the regular course of the taxpayer's trade or business and includes income from tangible and intangible property if the acquisition, management, and Disposition of the property constitute integral parts of the taxpayer's regular trade or business operations." § 32.200, art. IV, § 1(1). *fn2 The current revenue regulations attempt to elucidate this general definition by explaining that
ncome of any type or class and from any source is business income if it arises from transactions and activity occurring in the regular course of a trade or business. Accordingly, the critical element in determining whether income is "business income" or "nonbusiness income" is the identification of the transactions and activity which are the elements of a particular trade or business. In general all transactions and activities of the taxpayer which are dependent upon or contribute to the operations of the taxpayer's economic enterprise as a whole constitute the taxpayer's ...