Tulsa Tribune Co. v. State Ex Rel. Oklahoma Tax Commission , 768 P.2d 891 ( 1989 )

SUMMERS, Justice.

Tulsa Tribune Company (taxpayer), an Oklahoma corporation, appeals an assessment for additional franchise taxes for the year July 1, 1982 through June 30, 1983.¹ The Oklahoma Tax Commission (Commission) assessed additional franchise taxes after requiring appellant to report as capital used, employed or invested in Oklahoma certain undistributed income attributable to business activities of appellant’s wholly owned subsidiary, Harvard Inn, Inc. (subsidiary), and affiliate corporations, Newspaper Printing Corporation, Magic Empire Express, Tulsalite, Inc. and Green Country Distributors, Inc. (affiliates).

The Commission supports its assessment based upon its opinion that the terms of 68 O.S.1981 §§ 1201, 1203 and 1209 require corporate taxpayers to include undistributed income of subsidiaries and affiliates for purposes of annual franchise tax assessment. We disagree. The Commission’s position constitutes a reversal of a long standing construction of ambiguous statutes without cogent reason and in contravention of this court’s ruling in Oral Roberts University v. Oklahoma Tax Commission, 714 P.2d 1013 (Okla.1985).

We recognize, however that the Commission might appropriately assess franchise tax against a parent company based in part upon undistributed income of the parent’s subsidiary if the subsidiary were merely an adjunct of the parent. We therefore hold that absent specific legislation, assessment of Oklahoma franchise tax upon capital used, invested or employed in Oklahoma shall not include undistributed income of the tax paying company’s subsidiary or affiliate companies unless the Oklahoma Tax Commission finds that the subsidiary or affiliate companies function entirely as in-strumentalities or adjuncts of the parent, and that circumstances require disregard of separate corporate entities to avoid fraud or injustice.

Title 68 of the Oklahoma Statutes requires an annual franchise tax assessment “upon every corporation ... organized under the laws of this State.” 68 O.S.1981 § 1203. Oklahoma franchise taxes “become due and payable on the 1st day of each year ...” 68 O.S.1981 § 1208(c). This annual assessment is a privilege tax, its purpose being “to require the payment to the State of Oklahoma this tax for the right granted by the laws of this State to exist as such organization and enjoy, under the protection of the laws of this State, the powers, rights, privileges and immunities derived from the State by reason of the form of such existence.” 68 O.S.1981 § 1203.

No suggestion appears in the record that either Tulsa Tribune or its subsidiary or affiliates failed to pay franchise tax. The only dispute focuses upon which entity’s return should report as capital the undistributed income of the subsidiary and affiliates. The record reflects that appellant intended to report as it had always done, the cost of acquiring its interest in its subsidiary and affiliates, and that the subsidiary’s and affiliates’ undistributed profits would be reported and taxed as capital in the various companies’ annual franchise tax returns.

Since taxation remains a statutory creature, the initial question presented asks whether applicable Oklahoma franchise tax statutes require a parent company to report undistributed income of wholly owned subsidiary and/or affiliate companies as capital used, invested or employed in corporate activities in the state. We find no such statutory requirement.

Oklahoma assesses franchise tax upon business organizations based upon “capital used, invested or employed in the exercise of any power, privilege or right inuring to such organization within this State.” 68 O.S.1981 § 1203. The parties dispute the construction of 68 O.S.1981 § 1209, which statute provides in relevant part that

“ ‘[Cjapital’ shall be construed to include the following:

(1) Outstanding capital stock, surplus and undivided profits, which shall include any amounts designated for the payment of dividends until such amounts are definitely and irrevocably placed to the credit of stockholders subject to withdrawal on demand, plus the amount of bonds, notes, debentures or other evidences of indebtedness maturing and payable more than three (3) years after issuance. The term ‘capital stock’ where herein used shall include all written evidence of interest or ownership in the control or management of a corporation or other organization.” 68 O.S.1981 § 1209.²

The legislature may measure franchise tax based upon capital used, invested or employed, and indeed may define the term “capital” provided the definition is neither arbitrary nor unreasonable. Thompson Building Co. v. Oklahoma Tax Commission, 192 Okl. 1, 132 P.2d 962 (1942). We must determine not the validity but the proper construction of the applicable statute.

Tulsa Tribune complains that the Commission’s action forces it to adhere to an accounting practice chosen by the Commission.³ We considered and rejected the argument that tax statutes silent as to accounting practices could be construed to prohibit a particular accounting method. Oklahoma Tax Commission v. Liberty National Bank and Trust Co. of Oklahoma City, 289 P.2d 388 (Okla.1955).

In Liberty Bank, we affirmed the trial court’s order allowing the bank a refund of taxes paid under protest where no statute required taxpayers to use a particular accounting method, and the Commission refused to permit the bank to employ the “reserve for bad debt” method in determining worthlessness of bad debts. We ruled that the applicable statute⁴ was “aimed at problems of proof on the question of worthlessness of particular debts ... [and that] the statute in question has nothing to do with either allowing or prohibiting the use of the reserve for bad debts method of accounting by banks.” Liberty Bank, supra at 392.

As in Liberty Bank, the statutes before us contain no specific accounting requirements and therefore create no obligations for taxpayers to choose one acceptable method over another. Consequently, our inquiry must focus upon the existing language applicable to franchise tax computation, previous application and construction of applicable statutes, and the effect of such previous applications and constructions on the taxpayer before us, Tulsa Tribune.

This dispute turns upon that portion of the statute which defines “capital stock” as “all written evidence of interest or ownership in the control or management of a corporation or other organization.” 68 O.S. 1981 § 1209. This provision has been effective since 1963, and remains effective as amended in 1985.

The Oklahoma Tax Commission has applied this statute consistently to franchise tax returns since its enactment. The record reflects that until this 1982 assessment, the Commission never required a corporation to include undistributed income of subsidiary or affiliate companies as part of its tax base for purposes of franchise tax assessment.

Long standing precedents entitle an administrative agency to correct an erroneous interpretation of the law. Helvering v. Wilshire, 308 U.S. 90, 60 S.Ct. 18, 84 L.Ed. 101 (1939); Oral Roberts University v. Oklahoma Tax Commission, 714 P.2d 1013, 1014 (Okla.1986). Ordinarily however,

“the interpretation or construction of an ambiguous or uncertain statute by the agency charged with its administration is entitled to the highest respect from the courts, especially when the administrative construction is definitely settled and uniformly applied for a number of years. In such cases the administrative construction will not be disturbed except for very cogent reasons, provided that the construction so given was reasonable. Oral Roberts University at 1014-15.”

The record reflects that the Commission, in its ruling against Tulsa Tribune reversed its long standing application of the franchise tax statutes. Consequently, we inquire whether the statutory language at issue is subject to more than one interpretation, and if so, whether the Commission reversed its previous stance for cogent reasons.

We find that the parties interpret the statutory phrase “interest or ownership in the control or management of a corporation” very differently. 68 O.S.1981 § 1209. The Commission suggests that the language “written evidence of ... control or management” exists separate from and equal to the phrase “written evidence of interest or ownership in”. The sentence however contains no punctuation indicating that the two clauses are equal elements in a series. Rather, the sentence employs a string of prepositional phrases each subordinate to the one preceding it. Thus, grammatical imprecision renders the statute susceptible of varying interpretations which require clarification and correction.

Simply stated, capital stock includes all written evidence of interest or ownership. Once a company reports its holdings in other businesses, the degree of the parent company’s control or management of those other businesses becomes important in determining which entity, as between parent and subsidiary or affiliate pays franchise tax upon the subsidiary’s or affiliate’s undistributed income.

We make this determination by examining the cases, which define the method for computing the value of a corporation’s capital stock. In so doing, we find no cogent reason for the Commission’s reversal of its previous consistent application of the franchise tax statutes. The Commission urges that its interpretation of the statutes changed because of its erroneous application of the cases construing the predecessor licensing statutes which hold that capital stock shall be measured by its book value. Southwestern Light and Power Co. v. Oklahoma Tax Commission, 178 Okl. 277, 62 P.2d 637 (1936); Thompson Building Co. v. Oklahoma Tax Commission, 192 Okl. 1, 132 P.2d 962 (1942). We disagree.

In Southwestern Light and Power, we defined the value of a corporation’s capital stock for purposes of annual corporate licensing fee as book value, or the market value of the corporation’s assets minus its liabilities. Southwestern Light and Power 62 P.2d at 640.⁵ The Commission erroneously assumes that undistributed income of a subsidiary automatically qualifies as an asset of the parent. This assumption strains the holding in Southwestern Light and Power beyond its simple requirement that the Commission determine “book value” for franchise tax purposes by subtracting the taxpayer’s liabilities from its assets. Southwestern 62 P.2d at 639.

We determine which company uses, invests or employs the asset here at issue, namely undistributed income of the subsidiary and affiliates, by turning to the rules governing corporate entities. The general rule states that a corporation is a

“distinct legal entity, separate and apart from other legal entities, but this rule has its limitations. The distinct legal entity may be avoided if it appears from the examination of the entire facts either that (1) the separate corporate existence is a design or scheme to perpetrate fraud, or (2) that one corporation is so organized and controlled, and its affairs so conducted that it is merely an instrumentality or adjunct of another corporation. In other words, it must appear that one corporation is a dummy or a sham.” Gulf Oil Corp. v. State, 360 P.2d 933, 936 (Okla.1961).⁶

Further, the Tenth Circuit applied this general rule in affirming an order from the Western District of Oklahoma in an appeal to recover federal excise taxes paid under protest. Continental Oil Co. v. Jones, 113 F.2d 557 (10th Cir.1940); cert. den. 311 U.S. 687, 61 S.Ct. 64, 85 L.Ed. 443. The court found that the separate companies had been created in large part to evade taxes which justified disregard of separate corporate entities, and reasoned that

“the mere fact that a parent corporation owns all of the stock in a subsidiary, standing alone and without more, is not enough to warrant the disregard of their separate juridical entities. It usually is where such ownership of stock is used and employed not for the purpose of participating in the affairs of the subsidiary in the usual and normal manner but for the purpose of dominating and controlling it in such manner and to such extent that it becomes the mere agency or instrumentality of the parent (United States v. Lehigh Valley R.R. Co., 220 U.S. 257, 31 S.Ct. 387, 55 L.Ed. 458; United States v. Delaware, Lackawanna & Western R.R. Co., 238 U.S. 516, 35 S.Ct. 873, 59 L.Ed. 1438; Chicago, M. & St. Paul Ry. Co. v. Minneapolis Civic Association, 247 U.S. 490, 38 S.Ct. 553, 62 L.Ed. 1229; United States v. Reading Co., 253 U.S. 26, 40 S.Ct. 425, 64 L.Ed. 760), or where to maintain separate corporate entity would work fraud or injustice (Taylor v. Standard Gas Co., 306 U.S. 307, 59 S.Ct. 543, 83 L.Ed. 669) that they are treated as merged.”

Continental Oil Co. v. Jones, supra at 562.

By stipulation and agreement of the parties, the Commission in its findings of fact states that, “for the period in question, Protestant [taxpayer], through a wholly owned subsidiary ... also conducted certain real estate activities. In addition, Protestant conducts activities related to its newspaper publishing business through affiliates in which it owns less than one hundred percent (100%) of the stock interests ...” Absent from the record however, is any evidence which would enable us to determine whether Tulsa Tribune’s “ownership of stock is for the purpose of participating in the affairs of the subsidiary in the normal manner”, or “for the purpose of dominating and controlling it in such a manner and to such an extent that it becomes the mere agency or instrumentality of the parent.” Continental Oil, supra at 562.

The Commission bases this reversal of its long standing statutory application solely upon its claim that it has consistently misapplied this court’s ruling in Southwestern Light and Power Co. v. Oklahoma Tax Commission, supra. However, the Commission’s error occurred not with its application of the rule that “book value” applies to these determinations, but in its finding without proper evidence that the undistributed income attributable to Tulsa Tribune’s subsidiary and affiliate companies constitutes an asset controlled by Tulsa Tribune. Further, we do not agree that the earlier interpretation of Southwestern Light and Power Co. v. Oklahoma Tax Commission was incorrect. The Commission’s present erroneous application of existing law to the facts before it presents no cogent reason upon which the Commission may properly reverse its prior application of the franchise tax statutes.

Absent specific legislation, assessment of Oklahoma franchise tax on capital used, invested or employed in Oklahoma does not include undistributed income of the taxpayer company’s subsidiary or affiliate companies unless the Commission finds that the subsidiary or affiliate companies function entirely as instrumentalities or adjuncts of the parent, and that circumstances require disregard of separate corporate entities to avoid fraud or injustice. We therefore reverse the order of the Oklahoma Tax Commission and remand this matter for further proceedings consistent with this opinion.

HARGRAVE, C.J., and HODGES, LAVENDER, SIMMS, DOOLIN and KAUGER, JJ., concur. OPALA, V.C.J., dissents.

1 . In 1986 the Tax Commission withdrew its assessment and filed a Motion to Dismiss the appeal. The taxpayer objected to dismissal, urging from us an opinion to settle an issue of “great and far reaching importance to domestic and foreign corporations in Oklahoma." It also objected to what it viewed as an attempt “to avoid judicial review" by simply "withdrawing the challenged rule.” By Order dated November 10, 1986 we denied the Motion, citing Payne v. Jones, 193 Okl. 609, 146 P.2d 113 (1944), which held that questions involving tax matters may be of such public importance that the court need not withhold determination merely because the issues between the parties have become moot. Our vote on the November 10, 1986 Order was: Simms, C.J., Doolin, V.C.J., Hodges, Hargrave and Wilson, JJ., concur. Opala, J., Dissent: "I would dismiss and give a counsel-fee award.”

2 . This 1963 form of the statute was effective for the 1982 assessment here at issue. The legislature amended § 1209 in 1985 but those changes do not apply to the facts at issue. We note however, that the substance of the amendment does not alter the method of assessment.

3 . Appellant contends here as it did below that the Commission’s assessment requires it to use the "equity” rather than the “cost” method of accounting. The "cost” method uses company’s cost of acquiring interest or ownership in another entity in tax reporting. The “equity” method differs in that increase in value of the original investment applies in forming the tax base.

4 . 68 O.S.1951 § 887.

5 . While Southwestern Light and Power imprecisely uses the phrase "market value” in defining book value, we recognize that standard accounting principles define book value as the cost of assets minus liabilities. E. Kohler, A Dictionary for Accountants (4th ed. 1970).

6 . In this appeal from an order of the Oklahoma Corporation Commission, we ruled that the parent company was neither a common carrier nor a purchaser because its wholly owned subsidiary owned and operated the pipeline, the corporations had different directors, and subsidiary was not merely an instrument or adjunct of the parent. Gulf Oil Corp. v. State, 360 P.2d 933 (Okla.1961).