The correct standard to apply when determining whether an oil company's exploration and production operations are part of a unitary business under Minn. Stat. §á290.17, subd. 4(b) (1990), is whether the operations "are of mutual benefit, dependent upon, or contributory to" that company's refining and marketing operations. There is sufficient evidence to support the tax court's conclusion that the relator's exploration and production operations were not unitary with its refining and marketing operations.
Under the plain language of Minn. Stat. § 296.20 (1990), the gasoline excise tax is in lieu of all other taxes imposed specifically upon the transaction of selling or dealing in gasoline.
Heard, considered, and decided by the court en banc.
The opinion of the court was delivered by: Anderson, Paul H., Justice.
Took no part, Gilbert, J.
Relators, Amoco Corporation and eight of its fully owned subsidiaries, challenge the Commissioner of Revenue's computation of their corporate franchise taxes for the audit period from 1986 through 1990. During the audit period, relators filed Minnesota corporate franchise tax returns on a separate entity basis and paid aggregate corporate franchise taxes in the amount of $5,132,340. After conducting an audit of relators' returns, the Commissioner concluded that Amoco Corporation was a unitary business engaged in exploration, production, refining, and marketing; the entire income of the unitary business was therefore apportionable to Minnesota. Relators protested through an administrative appeal.
In a separate proceeding, one of the relators, Amoco Oil Company (AOC), filed amended corporate franchise tax returns, claiming a net refund for the years 1986-1990. During this time period, AOC paid Minnesota corporate franchise taxes in the amount of $3,768,533 and as a distributor of gasoline paid Minnesota gasoline excise taxes in the amount of $215,015,749. AOC asserted that its revenue from gasoline sales was not subject to the corporate franchise tax because the gasoline excise tax is in lieu of the corporate franchise tax. The Commissioner denied the refund claims and AOC protested through an administrative appeal.
The Commissioner consolidated the protests and concluded that Amoco Corporation existed as a unitary business and that AOC was not entitled to a refund. The Commissioner issued a notice of determination on appeal stating that relators owed an additional $23,629,300.38 in taxes and interest. Relators appealed. In an order granting summary judgment in favor of the Commissioner, the Minnesota Tax Court concluded that the gasoline excise tax is not in lieu of the corporate franchise tax. The unitary business issue went to trial, after which the court concluded that Amoco Corporation's exploration and production were not part of a unitary business with its refining, marketing, and transportation operations. The court then ordered the Commissioner to compute relators' tax, excluding all exploration and production income. We affirm both rulings.
Amoco Corporation and its Subsidiaries
Amoco Corporation is an Indiana corporation with its principal place of business in Illinois. It fully owns over 175 subsidiaries. Amoco Corporation and its subsidiaries operate a large integrated petroleum and chemical enterprise and conduct business throughout the world. Amoco Corporation defines itself as "a parent corporation concerned with overall policy guidance, financing, coordination of operations, staff services, performance evaluation, and planning for its subsidiaries." Operations are conducted through three principal, wholly-owned subsidiaries: Amoco Production Company (APC), Amoco Oil Company (AOC), and Amoco Chemical Company (ACC). APC and AOC are each stand-alone corporations with their own subsidiaries and operate independently from Amoco Corporation on a daily basis.
AOC is a Maryland corporation with its principal place of business in Illinois. It engages in the refining, marketing, and transportation of petroleum and related products. Specifically, AOC purchases crude oil, refines it into useful products such as gasoline, home heating fuel, and jet fuel, and then markets the refined products. The products are sold to a variety of users including AOC's own service stations, third-party service stations, or third-party fuel oil distributors. AOC's own stations sell retail and wholesale gasoline and other petroleum products. During the audit period, AOC did not operate a refinery in Minnesota, but it did market refined petroleum products here. AOC's marketing operations in Minnesota primarily consisted of storing refined products in terminals and selling those products to its own service stations and to third-party service stations and fuel oil distributors.
APC explores for and finds crude oil and gas reserves around the world and brings them to the surface. After locating an oil reserve and bringing the crude oil to the surface, APC engages in the production of the crude oil, which requires treatment to separate impurities. The crude oil then passes thorough a Lease Automatic Custody Transfer Unit, also known in the industry as the "wellhead." At the wellhead, the volume of oil that is moved to the market is measured and is "the basis on which the producer [is] paid for the crude oil that the company produced." APC sells the crude oil at the wellhead to refiners or brokers. A competitive pricing mechanism controls the prices of crude oil, and buyers place bids on the crude oil by posting competitive field prices. During the audit period, APC did not conduct any exploration or production activities in Minnesota, nor did it have any property, payroll, or sales in Minnesota. APC is not a party in this appeal.
a. Relationship between AOC and APC
APC and AOC made their operating decisions independently from one another. APC did not consider AOC's needs when deciding where to explore or how much crude oil to produce. It produced all the crude oil it was legally allowed to produce. AOC used the same bidding process and paid the same prices as other third parties when it purchased crude oil from APC. An employee of Amoco Corporation, the vice president of crude oil supply, set the field price used by AOC to bid on APC's crude oil. The price was set at a competitive market rate even though it was in APC's best interest for the price to be high and AOC's best interest for the price to be low.
AOC purchased both proprietary and nonproprietary crude oil. Proprietary crude oil is oil in which APC has an ownership interest and nonproprietary crude oil is crude oil that another company owns when it is being produced. AOC made decisions about whether to purchase proprietary or nonproprietary crude oil based on its operational needs and without regard to the production capabilities of APC. Throughout the audit period, the percentage of proprietary crude oil produced in the United States and then refined in Amoco Corporation refineries was about 15 percent while about 24 percent was from proprietary crude oil produced worldwide.
Despite the day-to-day independence of APC and AOC, Amoco Corporation retained some centralized management control over the subsidiaries. For example, Amoco Corporation offered subsidiaries, for a fee, services such as payroll, corporate insurance, legal counsel, and lobbying. The Commissioner asserts that in 1998, APC purchased about 227 million dollars worth of these services provided by Amoco Corporation.
Examination of Amoco Corporation's different operational areas sheds light on the extent of centralized management. We turn first to purchasing. APC and AOC each operated its own purchasing department and APC and AOC each made its own "decisions around how they ran them and how they staffed them." No single purchasing plan applied to all of the subsidiaries. However, the general manager of purchasing for Amoco Corporation reviewed the operations of the subsidiaries' purchasing departments with the goal of enhancing the subsidiaries' operations. Moreover, Amoco Corporation implemented a general policy for the subsidiaries to follow. The policy was directed at procuring goods and services at the most effective price and minimizing excess supplies. In their independent operations, the subsidiaries followed this policy and thereby accessed the capabilities of Amoco Corporation to improve cost effectiveness. Amoco Corporation's purchasing department also developed "master contracts" to assist the individual subsidiaries in purchasing their goods and supplies.
Amoco Corporation's human resources department also maintained a level of control over the subsidiaries. Each subsidiary maintained its own human resources department and staff and functioned independently of Amoco Corporation's human resources department. Nevertheless, the vice president of Human Resources for Amoco Corporation oversaw the human resources departments of the subsidiaries.
The employee compensation system illustrates how Amoco Corporation's human resources department interacted with its subsidiaries. Amoco Corporation's human resources department established employee compensation policies for the top 350 employees of Amoco Corporation and its subsidiaries. However, management of each individual subsidiary recommended policies for lower level employees based on that subsidiary's specific market.
Amoco Corporation also oversaw the subsidiaries' human resources departments by implementing a human resources corporate policy. The Amoco Personnel Policy Manuel codified "[p]olicies governing the various aspects of employee-employer relations in all domestic operations of Amoco Corporation and its subsidiaries." The manual set out broad policy, to be administered by each subsidiary in areas such as employee behavior, pay classifications, smoking, office environment, occupational health, and safety.
We next turn to the area of budget and financing. Amoco Corporation maintained some control over the financing and budget policies of the subsidiaries. For example, Amoco Corporation created one "consolidated control budget." The budget was based on a single forecast of corporate performance for the year and encompassed the three major operating subsidiaries. Amoco Corporation also maintained some control over the financing and debt of its subsidiaries. As a general policy, subsidiaries did not borrow money on their own and major items of long-term debt were issued in the name of Amoco Corporation, not in the name of the subsidiaries. When the subsidiaries borrowed money independently, Amoco Corporation usually guaranteed their debt. Amoco Corporation ...