An Evel Knievel Leap of Faith into a Grand Canyon of Evidentiary Void


General Robotics de Puerto Rico, Inc. v. Wisconsin Department of Revenue. Wisconsin Tax Appeals Commission, Nos.1-8860, 1-9390, and 1-10630, October 6, 1987.

Bartley, dissenting:

The majority’s conclusion that petitioner was doing business in Wisconsin is an Evel Knievel leap of inferential faith into a Grand Canyon of evidentiary void—spectacular to contemplate, but painful to watch. The record shows that petitioner had no sales activities in Wisconsin, no active employees, no agents, no property, indeed no operations whatsoever here. Therefore, I dissent because there is no evidentiary basis for the majority’s holding that petitioner was doing business in Wisconsin.

Before dealing with the specific flaws in the Commission’s decision, let’s review the facts.

The Stipulated Facts and the Commission’s Findings

The parties stipulated to certain facts and the Commission, on its own, made certain other findings. First, a summary of the stipulated facts.

  1. Stipulated Facts

Petitioner, a corporation, headquartered in Puerto Rico, but organized under Wisconsin law, was a wholly-owned subsidiary of General Robotics Corporation, also a Wisconsin corporation, but headquartered here. Throughout the years in question, petitioner operated in Puerto Rico where it manufactured and assembled its products. It sold its entire output to its parent for a price that “approximated fair market value.” Other than making sales to its Wisconsin parent, it engaged in no sales or marketing activities anywhere. All of petitioner’s property, including inventory, was located in Puerto Rico, as were all of its employees. The management of Puerto Rican operations was invested in an individual there, but from time-to-time, petitioner purchased certain management and administrative services from the parent, paying it a flat monthly charge that “was intended to approximate fair market value.”

The parties also stipulated that petitioner did not “directly engage in any business activities of any kind outside of Puerto Rico.”

2. Commission’s Findings of Fact

Unsatisfied with the parties’ stipulation, the majority entered its own additional findings of fact which either expand on or flatly contradict the stipulated facts.

One of the “expanding” findings was No. 32:

“The exhibits reflect that petitioner and its parent shared some, if not all, corporate officers, who were headquartered . . . in Wisconsin.” Building on this finding, the majority goes on to make the additional (and contradictory[1]) finding that:

“All orders for petitioner’s products originated in and, by implication since petitioner was directed to manufacture or assemble certain products, were accepted and approved in Wisconsin. These constituted sales activities in Wisconsin, where management functions were undertaken by petitioner’s officers, and other administrative duties were performed [on] its behalf. (No. 36) (Emphasis added.)

3. Majority’s Analysis

Proceeding from its additional findings of fact, the majority holds that:

“The petitioner, a Wisconsin corporation and legal resident, by its sales activity, the functioning of its management , and the performance of other administrative services in its behalf engaged in business within this state . . . . (Conclusion of Law No. 1)

Thus, the majority’s decision is based on three factors: petitioner’s corporate status, its sales activities in the state, and its management functions here, all of which the majority views as supporting the conclusion that petitioner was doing business in Wisconsin, but none of which, as we shall see, stand up under scrutiny.

First, however, let us consider the applicable law.

4. Applicable Law.

Although petitioner was subject to the state’s taxing jurisdiction because of its status as a Wisconsin corporation[2], that indisputable conclusion does not necessarily mean that any of its income was taxable in Wisconsin. To decide whether any of its income was subject to apportionment and therefore taxable here, we must ultimately[3] determine whether petitioner was engaged in business in Wisconsin within the meaning of Section 71.07(2) of our statutes which at that time provided that income is not subject to apportionment unless the taxpayer is “engaged in business within and without the state.” This is an inquiry which here one may be tempted to answer with a preemptory “no” on account of the stipulation in which respondent has agreed that petitioner did not directly engage in any business in Wisconsin.

Here the majority resists that temptation, reasoning, correctly I believe, that this part of the stipulation is not a stipulation of fact, but that it is a legal conclusion or at least conclusion of ultimate fact not binding on the Commission.

But the flight has just begun and there are far greater problems ahead, the first of which is the majority’s implication that petitioner’s status as a domestic corporation somehow constitutes doing business. (See Conclusion of Law No.1, ante.)

5. Petitioner’s Status as a Domestic Corporation

The reality is, however, that petitioner’s status as a domestic corporation—or perhaps more precisely as a corporation incorporated in Wisconsin—is not significant. Section 71.07(2) requires apportionment only when the taxpayer is “engaged in business within and without the state.” It makes no distinction between domestic and non-domestic corporations in its provision concerning what income is subject to apportionment. The effect of that provision is to say that only those corporations engaged in business in Wisconsin and at least one other state must apportion. It does not exclude domestic corporations from its operation. Thus, domestic corporations, like foreign corporations, must be engaged in business here before they can be required to apportion some of their income to Wisconsin.

Moreover, to argue for a disparity of tax treatment between domestic and foreign corporations would be to discriminate against our domestic corporations—those corporations whose sagacious incorporators were enlightened enough to choose Wisconsin as their place of incorporation—and in favor of a teeming hoard of alien corporations, barbarians mainly from Delaware it seems.

To press the case for such discrimination here would be the equivalent of saying that had petitioner been one of those rapacious Delaware aliens pillaging our state, any sums it plundered would pass out of our state tax-free, protected by an Act of Congress.[4] Our legislation could not have countenanced such iniquity.

6. Sales and Sales Activities

With its conclusion that sales activities are a basis for concluding that petitioner was engaged in business here, the majority flies into a wind shear of legal precedent and a maelstrom of evidentiary contradiction.

a. Legal Precedent

It is true that the existence of sales to a customer in Wisconsin suggests that the seller is indeed engaged in business in this state. But as the logic of our case law shows, without more, such sales do not amount to being engaged in business in Wisconsin.

For example, in United States Glue Company v. Oak Creek,[5] decided in 1915, the Wisconsin Supreme Court considered the same statutory language—”engaged in business within and without the state”—in connection with whether the amounts realized from goods manufactured in Wisconsin by [a] domestic corporation and sold outside the state were derived from doing business outside the state. Ruling in the negative on that point, the court said that “[t]he place of sale of such products does not change the place of business from [Wisconsin] to the state where the goods are sold” and that the source of the manufacturer’s income was in Wisconsin, “the place where the business is carried on.”

More recently, the court faced the same issue again in American Stores Dairy Company v. Department of Taxation.[6] There the issue was whether a dairy company, which manufactured evaporated milk in Wisconsin and sold the product in its chain stores throughout the United States, was engaged in business outside of Wisconsin. The court held the company not to be engaged in business outside the state, notwithstanding the constant presence of a number of key employees performing corporate functions in Illinois, the court describing as “too plain to require discussion” the proposition that the income of the company was “wholly attributable to its manufacturing business done in Wisconsin.”

Other Wisconsin cases have followed the same principle. Trane Co. v. Tax Commission[7] and Department of Taxation v. Blatz Brewing[8] each involved sales outside the state, and in each the court held that the taxpayer was not engaged in business outside the state.

The majority cities Applied Power Industries, Inc. v. Department of Taxation[9] was authority for the proposition that petitioner’s sales in to the Wisconsin parent amounted to its doing business in Wisconsin. But Applied Power, unlike this case, involved sales activities by the Wisconsin taxpayer’s warehousemen continuously present in other states. Here it has been stipulated that other than the sales themselves, there were no “sales activities” of petitioner in Wisconsin. Moreover, the orders in Applied Power were filled from inventory stored in the state of the customer, whereas here petitioner’s inventory was at all times stored where manufactured, it having been stipulated that all of petitioner’s property was held in Puerto Rico.

Thus it is clear that sales to out-of-state customers by a company headquartered in Wisconsin do not, in and of themselves, constitute being engaged in business outside Wisconsin. I take the converse of this to be true also—namely, that sales to Wisconsin customers by a corporation headquartered out-of-state do not, standing alone, constitute a doing of business in Wisconsin.

b. Evidence

The majority, possibly in recognition of the force of the legal precedent against it, bases its conclusion here in part on its finding that petitioner engaged in “sales activities”[10] in Wisconsin. But here again the majority has ignored, indeed contradicted, a stipulated fact, namely that there were no sales activities by petitioner in Wisconsin. Instead, by implication, apparently based on the fact that petitioner and its parent had at least some of the same officers, the majority concludes that all the parent’s orders for petitioner’s product were accepted and approved in Wisconsin. There’s not even a scintilla, much less an ounce, of fuel to make this finding fly, and a flight that soared off the precipice now begins an arc downward into the abyss.

7. Management Functions

Having determined that neither the wings of domesticity nor fuel of sales activities are enough to keep the majority’s craft airborne, we now consider the remaining issue, that being whether the management or administrative services, undertaken here by petitioner’s parent, can pull the craft out of an imminent death spiral. This issue turns on whether the parent, or its officers, employees, or agents, in performing such services, were acting as officers, employees, or agents of petitioner.

Again the answer is no.

On the question of an officer or employee relationship, although there is evidence that at least some of same individuals served as officers of both companies, this doesn’t really prove in what capacity those individuals were acting while they were performing the services. The majority simply assumes that those individuals were then acting in their capacities as officers or employees of petitioner. In fact, the record shows just the opposite—that none of the parent’s representatives were acting as officers or employees of petitioner in performing the services.

For one thing, the parties stipulated that all twelve people on petitioner’s payroll worked in Puerto Rico. Thus, by definition, petitioner had no active employees in Wisconsin, petitioner having no payroll here.

For another, it would be very difficult anyway to contend that the parent’s representatives performing the services were performing as employees of petitioner because there is no evidence that petitioner supervised them or paid them. In fact, the normal inference would be that these individuals were working as representatives of the parent, because the parent, not the individuals, received the compensation for the services.

And finally it would take a long stretch of legal imagination to conclude that the parent corporation itself was the employee of its subsidiary. This would be like saying that father is son, mother is daughter, and master is servant—conceivable in this age, perhaps, but still thoroughly unlikely.

On the question of an agency relationship between the parent or its representatives and petitioner; again there is no evidence. The test of agency is one of control by the principal over the agent[11], and here there was no showing of control which is “the continuous subjection to the will of the principal”.[12]

There being no evidence of petitioner’s employees or agents at work in this state, is I conclude that this is not a basis here for requiring apportionment.[13]

In sum then, because petitioner had no sales activities in Wisconsin, no active representatives, no property, and no operations here, it was not engaged in business in Wisconsin and, hence, was not subject to the franchise tax. I therefore dissent with appropriate eulogies to my brethren. (Alas, there was no net.)


[1] Contradictory because the stipulated facts are that there were no sales activities in Wisconsin, and further because there is no evidence that the Wisconsin officers were acting as representatives of petitioner in undertaking such services. See discussion, post.

[2] Guaranty Trust Co. v. Virginia, 305 US 19.

[3] I use the word “ultimately” because there is a preliminary process of reasoning required to isolate the “doing business” issue as the ultimate question. Whether petitioner was engaged in business in Wisconsin is, in the first instance, controlled by Section 71.07 (lm) of our statutes which at that time provided that “[i]ncome … from business, not requiring apportionment under sub. (2) … shall follow the situs of the business from which derived.” Thus, we must deal initially with two questions—first, whether the income involved here requires apportionment, and second; if not, what is the situs of the business from which the income is derived.

To answer the first question, we must turn to Section 71.07(2). That statute does not require apportionment unless the petitioner was “engaged in business within and without the state.” So it is that we must decide whether petitioner was doing business here.

The second question—the situs question—is one we need not, in an analytical sense, consider separately in this case. Because the only two possible situses where petitioner was engaged in business were Puerto Rico and Wisconsin, a finding that petitioner was not engaged in any business in one of those jurisdictions compels both a secondary finding that it conducted all of its business in the other, and a corollary, tertiary finding that the other state is the taxable situs of the business.

Thus it is that the ultimate issue here is whether petitioner was engaged in business in Wisconsin.

[4] P.L. 82-272.

[5] 161 Wis.211 (1915) (aff’d. 247 US 321 (1918)).

[6] 246 Wis. 396 (1945).

[7] 235 Wis. 516 (1940).

[8] 12 Wis. 2d 616 (1960).

[9] 25 Wis. 2d 219 (1964).

[10] The term “sales activities” is not defined in the stipulation. Since the parties stipulated that sales themselves were made in Wisconsin, one must conclude that the term sales activities means all sales-related functions except the sales themselves.

[11] Restatement of Agency, Second, Section 1.

[12] Id., Comment at Section 1.

[13] Project Systems, Inc. v. Department of Revenue, cited by the majority, is inapposite. It is true that the services in that case were performed by the parent’s employees for the subsidiary. But there, unlike here, the services were found to be performed by the parent’s employees under the direct supervision and control of the subsidiary. Moreover there, unlike here, the employees of the parent held themselves out to customers as the subsidiary’s employees.

Published in: on November 30, 2015 at 3:58 pm  Leave a Comment  

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