author: John A. Fogleman, Justice.

text:
    R. L. QUALLS, Director DEPARTMENT OF FINANCE AND ADMINISTRATION, State of Arkansas v. MONTGOMERY WARD & CO., INC.
    78-35
    585 S.W. 2d 18
    Opinion delivered July 2, 1979
    [Rehearing denied September 4, 1979.]

      Robert G. Brockmann, James R. Eads, Jr., Joseph V. Svoboda, Barry E. Coplin and Thomas Clark, Jr., by Jack East III, for appellant.

      William D. Dexter, Olympia, Wash., for amicus curiae (for appellant) Multistate Tax Commission.

      Richard A. Williams and Eugene G. Sayre of Williams, Selig, Overbey & Sayre, for appellee.

      George W. Koch, Washington, D.C. for amicus curiae (for appellee) Committee on State Taxation of Council of State Chambers of Commerce.
   John A. Fogleman, Justice.

This case involves the very complex problem of apportionment of income of a multi-state corporation for purposes of income taxation in the various states in which the corporation does business. Montgomery Ward & Company, Inc., is an Illinois corporation. Its corporate headquarters and principal place of business are in Chicago, Illinois. Its primary business is sale of a wide range of merchandise at retail outlets located in all but one of the states of the United States. It is qualified to do, and, during the years involved, did, business in Arkansas through retail stores, catalog stores, and catalog agency stores. It derives income from interest on loans made by it to its subsidiary, affiliate, parent and related corporations. On its corporate income tax returns to the State of Arkansas for its fiscal years ending February 2, 1972, January 31, 1973, and January 30, 1974, Ward deducted this interest income from its nationwide income before computing income tax due the State of Arkansas pursuant to the apportionment provision of the Arkansas version of the Uniform Division of Income for Tax Purposes Act [Ark. Stat. Ann. § 84-2055, et seq. (Supp. 1975 and 1977)].

After agents of the Arkansas Department of Finance and Administration had audited these returns, they disallowed this deduction of interest income and assessed an additional tax of $26,975.40, not all of which was attributable to this deduction. Ward protested and requested an administrative hearing, which was held before the Arkansas Revenue Department Hearing Board. On May 10, 1976, that board sustained the disallowance of this deduction, but reduced the assessment, because of the allowance of other protested items, to $17,148, which Ward paid under protest. Ward timely filed this suit for a refund in the Chancery Court of Pulaski County, where it was tried on April 5, 1977, and a decree entered on October 19, 1977. This appeal was taken from that decree. Ward has consistently taken the position that it correctly treated this interest as “non-business income,” as defined by Ark. Stat. Ann. § 84-2055 (e) (Supp. 1977), and that it should be allocated to Illinois, the state in which its principal office is located, for purposes of taxation, pursuant to Ark. Stat. Ann. § 84-2061 (Supp. 1977). Appellant, and his predecessors in office, have, at all times, contended that this interest income, for the years in question, should, for the purpose of taxation, be apportioned among all the states in which Ward did business, pursuant to Ark. Stat. Ann. § 84-2063 (Supp. 1977). The chancery Court agreed with appellee and rendered its decree for refund of the tax paid under protest. We disagree with the chancery court and agree with appellant.

In its complaint, Ward alleged that this interest was “non-business income,” as defined by the statute, because it was not an integral part of its regular trade or business operations. In the alternative, Ward asserted that this section violated the due process and equal protection clauses of the Constitution of Arkansas and the Fourteenth Amendment to the Constitution of the United States and the commerce clause of the United States Constitution. The chancery court decided the case without reaching the constitutional questions. It was proper for that court to do this, if it correctly held that the interest was “non-business income.” Since the correctness of that holding is appellant’s first point for reversal, we approach it first.

The tax was assessed on the basis of a definition of business income now set out in Regulation IV. 1(a) of the Arkansas Revenue Department, an agency of the Department of Finance and Administration. Pertinent language of that regulation follows:

In essence, all income which arises from the conduct of trade or business operations of a taxpayer is business income. For purposes of administration of Article IV [of the Multistate Tax Compact], the income of the taxpayer is business income unless clearly classified as non-business income.
i> id *
*** Income 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 trade or business and will be transactions and activity arising in the regular course of, and will constitute integral parts of, a trade or business.

Regulation IV.7(3) also speaks on the subject, viz:

Interest income is business income where the intangible with respect to which the interest was received arises out of or was created in the regular course of the taxpayer’s trade or business operations or where the purpose for acquiring and holding the intangible is related to or incidental to such trade or business operations.

Several examples illustrative of the application of interest income to be treated as business income under Regulation IV.7(3) follow the text of the regulation. None of them specifically cover the interest involved here, but they do include interest on federal income tax refunds, interest on a judgment against a debtor, interest on a special account maintained to cover workmen’s compensation, rain and storm damage, and machinery replacement, interest on temporary investment of funds intended for payment of federal, state and local taxes, interest on funds held pending redemption of money orders and traveler’s checks issued by the taxpayer, interest on working capital and extra cash invested in securities, and interest on the proceeds of sale of a subsidiary which are held in an interest-bearing account until utilized.

Litigation related to income taxes is usually complex because of the necessity for tax laws to be drafted in language peculiar to that field of taxation, but broad enough to cover the declaration of legislative intent as to taxable income, deductions, and exemptions. In order to carry out the legislative intent, it is necessary for the General Assembly to adopt statutory definitions of terms used in an effort to minimize differences in interpretations of the legislative intent which would inevitably arise from efforts to apply the usual and ordinary meanings given the statutory words. In a uniform act definitions are, of course, intended to promote uniformity in the application of tax laws.

Dealing with the equitable taxation of a multi-state corporation, enmeshed in a pattern of intercorporate and in-tracorporate dealings with parents, affiliates and subsidiaries, appears to have been a serious problem to the legislators and administrators and the problem of judicial interpretation of unfamiliar technical language applied to an unfamiliar field becomes the most perplexing of all statutory interpretations. When constitutional issues are involved, the matter is further complicated. An additional problem is the necessity for preserving and promoting uniformity of application of a uniform act in all the states adopting it. See Ark. Stat. Ann. § 84-2073 (Repl. 1977).

There is virtually no dispute about the facts. The real question involved is one of statutory interpretation and the application of that interpretation to the facts. The basic question is whether interest earned on loans and advances by one member of a complex corporate family to its corporate parent, its corporate siblings, and its corporate children, is business or non-business income, as those terms are defined by statute.

The basic statutory provision involved is a section of Act 413 of 1961, which as amended, is digested as Ark. Stat. Ann. § 84-2055 et seq. (Supp. 1977). The act is the adoption by Arkansas of the Uniform Division of Income for Tax Purposes Act, known as UDITPA. It appears to have been adopted as an effort to bring about uniformity among the states in taxing the income of multi-state corporations and to establish an equitable basis for taxation by avoiding potential duplication of taxing of the same income and by providing for a fair means of assigning taxable income among the states. The particular section is Ark. Stat. Ann. § 84-2055 (a), defining business income. Appellant contends that the interest in question is business income to Ward and that it should be apportioned among the states in which Ward does business, in the same manner as Ward’s other business income. Ward contends, and the chancery court held, that this interest is not an integral part of its regular trade or business and, therefore, is non-business income taxable only in the State of Illinois. The answer requires us to interpret § 84-2055 (a) and apply it to the facts. The pertinent part of that section reads:

“Business income” means 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. ***

Non-business income is all income other than business income as above defined. Ark. Stat. Ann. § 84-2055 (e) (Supp. 1977).

The method of assigning income among the various states under UDITPA involves a three-factor apportionment formula. This formula involves a determination of three ratios, based upon property, payroll and sales. Insofar as Arkansas and Ward are concerned, the ratios are determined by dividing the particular factor, as it relates to Arkansas, by Ward’s total for that factor. For example, Ward’s total sales in Arkansas divided by Ward’s total sales produces one factor. When each of the factors is determined, they are averaged by adding them and dividing by three. The taxpayer’s net business income is then multiplied by the resulting fraction and the result is the amount of Ward’s income which is subject to income tax in Arkansas. Non-business income is not apportioned, but is allocated to a certain state under the provisions of the act. Interest is one of the types of income from intangibles allocated to the domicile of the corporation, i.e., Illinois, in this case. The fact that the interest income may have been actually earned entirely within the state of Illinois is not controlling, if it is indeed business income under the statutory definition. The entire statutory apportionment formula involves items which are otherwise unrelated to Arkansas. In order to determine the net income to which is applied the Arkansas fraction resulting from the three-factor formula, deductions were made from the income shown on Ward’s federal income tax returns, after the interest income involved here had been eliminated. These deductions include such items as interest expense of Ward paid for the use of funds borrowed for general business purposes. No money has been borrowed by Ward for the specific purpose of making loans or advances to affiliates or subsidiaries. Some of the interest expense deducted is for interest paid on loans for property acquired in other states. All interest deductible on the federal income tax return was deducted before arriving at the income taxable in Arkansas. The expense of all repairs made in all states in which Ward has facilities is likewise deducted. Bad debts on accounts receivable both within and without Arkansas are also deducted. Nationwide depreciation and amortization are other such deductions.

There was no activity in Arkansas in relation to the loans and advances from which the interest in question was derived. The financial department of the office of Ward’s treasurer in Chicago is the only department of the company involved. This activity is an insignificant part of the overall activities of Ward. The funds for the loans and advances come from cash available after projection of Ward’s own cash needs. Ward’s treasurer is responsible for the overall maintenance of Ward’s financial position. He reviews all potential dispositions and acquisitions. Acquiring the interest income was not the purpose for which the loans in question were made and making them was not considered an integral part of the funding of the merchandising operation.

One of the companies to which loans were made was the holding company which owned Ward and three other corporations that do no business in Arkansas. Three others were real estate subsidiaries of Ward whose only function was to hold title to real estate used by Ward in the furtherance of its retail business. None of this real estate is in Arkansas. These subsidiaries and many others are operated at a loss from the standpoint of federal income tax. Among the companies were subsidiaries which sold a major part of their products to Ward. Some of them sold nothing to, and bought nothing from, Ward and have no transactions with Ward other than loans and advances made to them. One of the subsidiaries is a credit corporation that acquiries all accounts receivable of Ward. Ward retains the interest on the accounts but it seems that the finance company purchases the accounts at a discount. It is clear that most of the subsidiaries do no business in Arkansas and are not qualified to do business in Arkansas. None of them have any inventory, employees or physical facilities in Arkansas. There is no evidence that any of them do any business in Arkansas.

The loans and advances were made to meet the cash needs of the affiliates and subsidiaries for their corporate purposes, including acquisition of buildings, current expenses and other legitimate business purposes. It is admitted that it is possible that they are made to fund operating losses.

If some of the subsidiaries which are Ward’s suppliers should go out of business, Ward would have to find new suppliers. Ward is interested in the well-being of its holding company and Ward’s state and local tax manager testified that it is rather doubtful that Ward would refuse to make a loan to that company. That witness also testified that Ward was indeed interested in keeping the credit company afloat, that it would not be helpful to Ward for its subsidiaries holding title to its real estate to go bankrupt, that it was in the best business interest of Ward that the subsidiary that owned Ward’s executive office building (which it had outgrown) continue in operation. He also testified that pricing policies of the subsidiaries are negotiated with Ward at arms length, just as Ward negotiates with any other supplier. The prices of one subsidiary must be the same for Ward as for other customers in order to avoid violation of anti-trust laws. Ward charges management and operations expenses to its subsidiaries, and either Ward or the holding company approves their budgets. Subsidiaries of Ward cannot expand their operations without Ward’s approval and affiliates cannot, without the holding company’s approval.

The funds for loans and advances to the related corporations come from Ward’s working capital cash. The working capital represents all the liquid assets of Ward that are available in the furtherance of its business. Income earned in Arkansas and other states from retail operations and interest income on trade accounts receivable become a part of the working capital. All funds are put into a general cash reserve to be used as needed and no effort is made to segregate or isolate any of the funds derived from sales in a particular state or from returns on any investments. Loans are made to a related corporation by Ward when that corporation cannot meet its own needs for cash. Ward will supply cash to meet the needs of its subsidiaries as long as it has cash available above its own needs. Loans and advances are made regularly and consistently, and were during the three years in question, with the exception of one or two of the subsidiaries to which single loans were made for property acquisition. The loans are made for varying terms. Some are short term, and at least one is for a term of 20 years.

The “Cash Operations Manager,” an employee of the Treasurer’s Division of Ward, actually handles the advances to the subsidiaries, and accounts for, manages and services them and records all the advances and payments. The cash funds received as interest income from these loans are commingled with all other general cash funds of Ward, and become a part of Ward’s working capital to be used for Ward’s general corporate purposes, which may include other loans to subsidiary or affiliated corporations. As a result, money received from this interest income might be used for payment for advertising in Arkansas, for inventory in Arkansas or payment of salaries in Arkansas; however, no effort is made to identify the flow of cash in this account.

The interest on the loans and advances to corporate relatives is income from intangible property belonging to Ward. Due to the regularity and consistency of these loans and advances, the income arises from transactions and activity in the regular course of Ward’s business. In Champion International Corp. v. Bureau of Revenue, 88 N.M. 411, 540 P. 2d 1300 (1975), the New Mexico Supreme Court defined the phrase “transactions and activity in the regular course of the taxpayer’s trade or business” in this section, thus:

Business deals and the performance of a specific function in the normal, typical, customary or accustomed policy or procedure of the taxpayer’s trade or business.

It must be remembered that these transactions are not required to be in the course of Ward’s regular trade. It is only required that the transactions be in the “regular course of the taxpayer’s trade or business operations.” See McVean & Barlow, Inc. v. New Mexico Bureau of Revenue, 88 N.M. 521, 543 2d 489 (1975).

The acquisition, management and disposition of the working capital most assuredly constituted an integral part of Ward’s regular trade or business operation. The use to which the interest was put after it was paid is also of some significance in determining whether it is business income. Its use, just as other working capital is used, also leads to the conclusion that it is business income. Champion International Corp. v. Bureau of Revenue, supra; Montgomery Ward & Co. v. Commissioner of Taxation, 276 Minn. 479, 151 N.W. 2d 294 (1967). See also, Great Lakes Pipe Line Co. v. Commissioner of Taxation, 272 Minn. 403, 138 N.W. 2d 612 (1965), appeal dismissed, 384 U.S. 718, 86 S. Ct. 1886, 16 L. Ed. 2d 881 (1966).

Thus, the interest from the loans and advances clearly constitutes business income as defined in Ark. Stat. Ann. § 84-2055 (a). The fact that Ward’s regular trade or business operations do not include money lending is of no significance. Obviously, the lending of money to Ward’s related corporations consists of transactions and constitutes an activity in the regular course of Ward’s business. We cannot view these loans and advances as a mere temporary investment of idle cash, as Ward would have us do. Even if they were, any short term investment of these funds pending their eventual use in the course of Ward’s regular business operations might well be apportionable. Sperry & Hutchinson Co. v. Department of Revenue, 270 Or. 329, 527 P. 2d 729 (1974); Montana Department of Revenue v. American Smelting & Refining Co., 567 P. 2d 901 (Mont., 1977), appeal dismissed, 434 U.S. 1042, 98 S. Ct. 884, 54 L. Ed. 2d 793 (1978); Great Lakes Pipe Line Co. v. Commissioner of Taxation, supra.

Appellee relies upon Western Natural Gas Co. v. McDonald, 202 Kan. 98, 446 P. 2d 781 (1968), to support its contention that the interest in question is not business income. That case is not really pertinent here. The item of income held not to be business income under UDITPA in that case was the gain on the liquidating sale of oil and gas leases actually held in the state of Kansas. The Kansas Supreme Court, however, applied a basic test, not identical, but similar in effect, to that we have, i.e., that the controlling factor was the nature of the particular transaction giving rise to the income. It is said that the transaction and activity “must have been in the regular course of taxpayer’s business operations.” We would likely agree with the Kansas court that the income was not ap-portionable, if we were treating the capital gain from a sale of similar assets in liquidation.

Appellee contends that two sentences added to § 84-2055 (a) by Act 529 of 1963 (repealed by Act 1024 of 1979, after this case was submitted) clearly show that there was no legislative intent that interest on its loans to related corporations be included as “business income.” Those two sentences read:

Business income shall include any dividends or interest paid to a corporation having its commercial domicile in this state by another corporation provided the recipient owns at least 50% of the outstanding capital stock of the distributing or paying corporation. If the recipient corporation owns less than 50% of the outstanding capital stock of the distributing or paying corporation, such dividends or interest shall be nonbusiness income and shall be allocated and taxed as such.

We cannot agree with appellee. The basic definition of business income remained unchanged. The scope of the term was extended where a corporation, domiciled in Arkansas, and owning 50% or more of the stock of a subsidiary, would be required to include all interest paid to it by that subsidiary as business income, to be apportioned among the states in which the parent corporation did business, if those states had a formula for apportionment of business income. Only if the parent having its commercial domicile in Arkansas owned less than one-half of the stock of the subsidiary would the interest be allocated to Arkansas as non-business income. This does not mean that other states would have to treat such interest income in the same manner. But more importantly, the added sentences were not controlling when the interest arose from transactions and activities in the regular course of the parent’s business and was income from money, the acquisition, management and disposition of which constitute an integral part of the parent’s regular business operations, unless the interest was paid by a corporation in which the recipient owned less than one-half of the stock. The two sentences added brought into the scope of business income for apportionment purposes, any interest from a subsidiary of a parent owning more than 50% of the stock of the former when the transactions and activities from which the interest was earned were not in the regular course of the parent’s business, and when the acquisition, management and disposition of the money lent were not an integral part of the parent’s business. Those sentences also covered dividends, which are not involved here. The treatment of dividends from related corporations would not necessarily fail within the basic statutory definition of business income and a determination whether they did before these two sentences were added would depend upon the circumstances under which the stock was acquired.

It seems to us that Ward’s purpose and intent in making the loans and advances were to assure financial stability and continued operation of its corporate relatives, most of whom are suppliers of Ward or furnishers of services. Some of these borrowers who are operating at a loss probably would be hard pressed to obtain loans from other sources. Keeping these corporations “afloat” is beneficial to Ward’s regular business, conducted in 49 states.

Ward’s borrowers, with one possible exception, cannot expand their operations without the approval of either Ward or Ward’s parent, which is also Ward’s only stockholder. Management and overhead expenses are paid to Ward by its subsidiaries in relation to these loans. This is certainly not a usual or ordinary practice where a loan is made as a temporary investment by the lender. And, finally, the record shows that the loans and advances actually are a part of Ward’s regular business operations, if that matters.

We do consider that appellee’s emphasis on the fact that not more than 0.4% of its total gross income and only 6% of its interest income came from loans and advances to subsidiaries is not justified. That fact does not seem significant to us. However small the income may be in proportion to Ward’s total income does not mean that the transactions and activities giving rise to it were not in the regular course of Ward’s business or the money lent not accumulated, managed or disposed of as an integral part of its regular business operations. Integral does not mean indispensable or essential. See American Smelting & Refining Co. v. Idaho State Tax Commission, 99 Idaho 924, 592 P. 2d 39 (1979).

Ward contends that appellant’s refusal to permit Ward and its related corporations to report income on the “combined income” method is inconsistent with his position on those items of interest. It seems to think that requiring this interest to be reported as business income amounts to piercing the corporate veil and identifying all the corporations as if they were one. We cannot agree with this position. In the first place, appellant is not seeking to tax the income of any of the related corporations. It is the nature of the transactions and activity and the source and nature (not the location) of the funds used to make the loans and advances that control, not just the identity of the corporations paying the interest. We have not treated the business of Ward and its corporate relatives as forming a single “unitary business.” Only recently the Supreme Court of Idaho pointed out the appropriateness of making this distinction in American Smelting & Refining Co. v. Idaho State Tax Commission, supra. That court said:

* * * Simply because the management, operation and activity of a corporation in which the taxpayer owns stock is not so closely connected with the management, operation and activities of the taxpayer to warrant a combined tax return, does not ipso facto mean that the dividends the taxpayer receives from that stock cannot be “income arising from transactions and activities in the regular course of the taxpayer’s trade or business” and that the “acquisition, management, or disposition” of the stock does not “constitute integral or necessary parts of the taxpayer’s trade or business operations.” I.C. § 63-3027 (a)(1). The combined reporting provision and the business income definition serve different purposes, ask different questions and apply different standards. The answer to one does not necessarily imply the same answer to the other.

Appellee makes an attack upon the regulations adopted by the revenue department, i.e., those set out at the beginning of this opinion. It contends that they are being improperly applied retroactively, and that they have never been properly adopted. The latter contention was abandoned in the trial court. We do not base our decision upon these regulations, so we need not consider the objections made by Ward. Our decision is based upon our construction of the applicable statutory provisions. The only significance of these regulations is that they reflect the revenue department’s view of the proper application of the statute at the time the assessment was made against Ward.

Since we find the interest in question to be business income, it is necessary that we resolve the issue of constitutionality raised by appellee. Ward contends that taxation of this income is a violation of the due process clause of the Fourteenth Amendment and of the commerce clause of the United States Constitution. We do not agree. UDITPA, as adopted in Arkansas, enjoys the presumption of constitutionality common to all legislative enactments, which is that it is presumptively constitutional and all doubt as to its validity must be resolved in favor of the act. Redding v. State, 254 Ark. 317, 493 S.W. 2d 116.

The constitutionality of the concept of formulary apportionment under both the due process and commerce clauses is now well established. See Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed. 2d 197 (1978). The burden is upon the taxpayer to show that a formula such as that used in Arkansas places a burden on interstate commerce in a constitutional sense. Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S. Ct. 357, 3 L. Ed. 2d 421, 67 ALR 2d 1292 (1959). See also, Norfolk & Western Railway Co. v. Missouri State Tax Commission, 390 U.S. 317, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968); Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879 (1930). One who attacks such a formula must show by clear and cogent evidence that its use results in extraterritorial values being taxed. Butler Bros. v. McColgan, 315 U.S. 501, 62 S. Ct. 701, 86 L. Ed. 991 (1941); General Motors Corp. v. State, 181 Colo. 360, 509 P. 2d 1260 (1973). See also, Fleming v. Oklahoma Tax Commission, 157 F. 2d 888 (10 Cir., 1946). The taxpayer also bears the burden of showing that application of a formula violates due process. Hans Rees’ Sons, Inc. v. North Carolina, supra. See also, Cook v. Kansas City Southern Ry. Co., 212 Ark. 253, 205 S.W. 2d 441, cert. den. 333 U.S. 873, 68 S. Ct. 902, 92 L. Ed. 1150 (1948). Appellee concedes, in its brief, that the question of arbitrariness and unreasonableness of the three-factor formula of UDITPA is not in issue. It contends that inclusion of the interest in question as business income is an attempt at extrastate taxation, prohibited by the due process clause and the commerce clause.

Taxes are imposed on corporations doing business in a state as a pecuniary charge for the protection the state affords them in their operations within the state. Great Lakes Pipe Line Co. v. Commissioner of Taxation, 272 Minn. 403, 138 N.W. 2d 612 (1965), appeal dismissed, 384 U.S. 718, 86 S. Ct. 1886, 16 L. Ed. 2d 881 (1966); Southern Pacific Co. v. McColgan, 68 Cal. App. 2d 48, 156 P. 2d 81 (1945). See also, Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S. Ct. 246, 85 L. Ed. 267 (1940). Providing an orderly market in which the taxpayer may do business is sufficient basis. General Motors Corp. v. State, supra. The limitation on a state’s power to tax a foreign corporation is that the measure of the tax must bear some reasonable relation to its doing business in the state. Southern Pacific Co. v. McColgan, supra; Wisconsin v. J. C. Penney Co., supra; Hans Rees’ Sons, Inc. v. North Carolina, supra. There must be some minimal connection between the activities and the taxing state. Moorman Manufacturing Co. v. Bair, supra.

Of course, a state may violate the commerce clause when it discriminates against interstate commerce by subjecting it to the burden of multiple taxation to which local commerce is not exposed. Northwestern States Portland Cement Co. v. Minnesota, supra. Gwin, White & Prince, Inc. v. Henneford, 305 U.S. 434, 59 S. Ct. 325, 83 L. Ed. 272 (1939); Gulf Oil Corp. v. Joseph, 307 N.Y. 342, 121 N.E. 2d 360 (1954). A tax levied by a state may run afoul of the due process and interstate commerce clauses, if it is not laid on property, business done, or transactions carried on within the state. Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77, 58 S. Ct. 436, 82 L. Ed. 673 (1938); Gwin, White & Prince, Inc. v. Henneford, supra.

A state does not violate the Fourteenth Amendment when its legislature, faced with the practical impossibility of allocating specifically the profits earned by a corporation engaged in interstate commerce through processes conducted within the borders of that state, adopts a method of apportionment that reaches, and was meant to reach, only the profits earned within the state. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 41 S. Ct. 45, 65 L. Ed. 165 (1920). See also, Gwin, White & Prince, Inc. v. Henneford, supra.

The entire net income of a corporation generated by interstate, as well as intrastate, activities may be fairly apportioned among the states for tax purposes by a formula utilizing in-state aspects of interstate affairs without violating either the due process or commerce clauses of the United States Constitution. Northwestern States Portland Cement Co. v. Minnesota, supra; Butler Bros. v. McColgan, supra. See also, Gwin, White & Prince, Inc. v. Henneford, supra.

Net income from the interstate operations of a foreign corporation may be subjected to state taxation, provided the levy is not discriminatory and is properly apportioned to local activities within the taxing state, forming sufficient nexus to support the same, without violating either the due process or commerce clauses of the United States Constitution. Northwestern States Portland Cement Co. v. Minnesota, supra; Wisconsin v. J. C. Penney Co., supra; Gulf Oil Corp. v. Clayton, 267 N.C. 15, 147 S.E. 2d 522 (1966); American Smelting & Refining Co. v. Idaho State Tax Commission, supra. See also, Cook v. Kansas City Southern Railway Co., supra; Roadway Express, Inc. v. Director, Division of Tax, 50 N.J. 471, 236 A. 2d 577 (1967), appeal dismissed, 390 U.S. 745, 88 S. Ct. 1443, 20 L. Ed. 2d 276 (1968); Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S. Ct. 1076, 51 L. Ed. 2d 326 (1977). Cf. Hans Rees’Sons, Ins. v. North Carolina, supra.

Not only must there be some minimal connection between the business activities generating the income and the taxing state, the income attributed to the state for taxing purposes must be rationally related to values connected with the taxing state. Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed. 2d 197 (1978). The mere fact that the demand of the tax exaction is contingent upon events brought to pass outside the state does not destroy the nexus between the tax and transactions within the state for which the tax is an exaction. Wisconsin v. J. C. Penney Co., supra.

The three-factor formula (or another quite similar) has been held to be constitutional in that it does not violate either the due process clause or the commerce clause of the Constitution of the United States. Oklahoma Tax Commission v. Southwestern Bell Telephone Co., 396 P. 2d 500 (Okla., 1964); Great Lakes Pipe Line Co. v. Commissioner of Taxation, supra; Walgreen Co. v. Commissioner of Taxation, 258 Minn. 522, 104 N.W. 2d 714 (1960). See also, Butler Bros. v. McColgan, supra. The mere fact that application of the formula may result in some overlapping of measures of net income among states is not fatal. Great Lakes Pipe Line Co. v. Commissioner of Taxation, supra; General Motors Corp. v. State, 181 Colo. 360, 509 P. 2d 1260 (1973); Moorman Manufacturing Co. v. Bair, supra; American Smelting & Refining Co. v. Idaho State Tax Commission, supra; Walgreen Co. v. Commissioner of Taxation, supra. See also, Southern Pacific Co. v. McColgan, 68 Cal. App. 2d 48, 156 P. 2d 81 (1945). It is not necessary that a state demonstrate that an apportionment formula results in exact measure in order to avoid transgression of the due process and commerce clauses. Norfolk & Western Railway Co. v. Missouri Tax Commission, 390 U.S. 317, 88 S. Ct. 995, 19 L. Ed. 2d 1201 (1968). See also, Hans Rees’ Sons, Inc. v. North Carolina, supra. Mathematical exactness is impossible and any method of apportionment will contain imperfections. Fleming v. Oklahoma Tax Commission, 157 F. 2d 888 (10 Cir., 1946).

In considering the validity of a state’s apportionment formula in the light of the prohibition against a state’s burdening interstate commerce, the United States Supreme Court has recognized the practical impossibility of a state’s achieving a perfect apportionment of expansive, complex, multi-state business activities, and finds a rough approximation, rather than precision, sufficient. Unless it is demonstrated that an apportionment formula which includes consideration of interstate and out-of-state transactions in relation to the intrastate privilege of doing business produces a palpably disproportionate result, making it patent that the tax is levied upon interstate commerce, the state’s tax law will not be nullified. International Harvester Co. v. Evatt, 329 U.S. 416, 67 S. Ct. 444, 91 L. Ed. 390 (1947); Moorman Manufacturing Co. v. Bair, supra; Gulf Oil Corp. v. Joseph, 307 N.Y. 342, 121 N.E. 2d 360 (1954); General Motors Corp v. State, 181 Colo. 360, 509 P. 2d 1260 (1973). Cf. Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S. 123, 51 S. Ct. 385, 75 L. Ed. 879 (1930).

In considering the questions of constitutionality, it appears that neither the overall operation of related businesses in different states, unity of ownership of stock in separate corporations engaged in related business, nor business transactions between related corporations, creates the required integration of business operations to justify a state claiming a proportionate share of income earned through foreign sources. See, Square D. Co. v. Kentucky Board of Tax Appeals, 415 S.W. 2d 594 (Ky., 1967), and cases cited therein. We are dealing, however, with an entirely different situation. Income earned in Arkansas went into Ward’s working capital. In the regular course of Ward’s business, loans and advances to related corporations earned interest which also went into working capital, a part of which was used to carry on operations in Arkansas. The interest goes into a fund that will be used, in part, in Arkansas, and the supplies and services received from the borrowers contribute to the conduct of Ward’s business in Arkansas. These facts provide the necessary nexus, not to justify taxation of the total amount of this interest income, but to justify taxing that portion attributable to Arkansas under the three-factor apportionment formula.

A fundamental part of appellee’s argument that the essential nexus with this state for taxation is lacking is its contention that the loans are the investment of temporarily idle funds. We have already disposed of that contention. It seems to us that appellee’s argument must fall with the basic premise of its argument. This interest involved was earned on principal which was derived, in part, from earnings in Arkansas.

Arkansas is not taxing the interest income from these loans and advances as such. It is simply included in the ap-portionable business income. Neither is Arkansas seeking to tax income of Ward derived outside its regular course of business or from investments totally unrelated to its regular business operations. The income tax is not levied on the particular business activity of the multi-state corporate taxpayer carried on within the borders of Arkansas. It is levied on the percentage of the taxpayer’s business income from all its business activity apportioned to Arkansas under the three-factor apportionment formula. This does not violate due process constitutional requirements. Champion International Corporation v. Bureau of Revenue, 88 N.M. 411, 540 P. 2d 1300 (1975). See also, Southern Pacific Co. v. McColgan, 68 Cal. App. 2d 48, 156 P. 2d 81 (1945).

It is quite true that there is some risk of double taxation in the “business income” definition of UDITPA, but the formula is designed to avoid that risk and the risk would be eliminated if all states used the three-factor apportionment formula and applied it uniformly. GTE Automatic Electric, Inc. v. Allphin, 68 Ill. 2d 326, 12 Ill. Dec. 134, 369 N.E. 2d 841 (1977). There seems to be no significant possibility that Illinois will not consider that this income is apportionable. Such minimal risks are not fatal, because neither the due process clause nor the commerce clause requires total precision in multi-state taxation. Moorman Manufacturing Co. v. Bair, 437 U.S. 267, 98 S. Ct. 2340, 57 L. Ed. 2d 197 (1978); American Smelting & Refining Co. v. Idaho State Tax Commission, supra; General Motors Corp. v. State, 181 Colo. 360, 509 P. 2d 1260 (1973).

We find that the interest on Ward’s loans and advances from its working capital to its corporate relatives constitutes business income, as defined by Ark. Stat. Ann. § 84-2055 (a), and that the act, as thus construed and applied, does not violate either the due process clause or the commerce clause of the United States Constitution.

The decree is reversed.

We agree. Harris, C.J., George Rose Smith and Holt, JJ-


source: Caselaw Access Project

license: Public Domain

text:
    Kenneth R. SCALF Et Al v. John S. PAYNE
    79-29
    583 S.W. 2d 51
    Opinion delivered July 2, 1979
    (Division II)

      Robert C. Compton, of Brown, Compton & Prewelt, Ltd., and
      Jerry G. James, for appellants.

      Spencer & Spencer, for appellee.
   John A. Fogleman, Justice.

The issue on this appeal is whether one of multiple defendants in a tort action, who is found not negligent, is a joint tortfeasor in the sense that codefendants are entitled to credit for any amount paid by him before trial for a release of liability.

John S. Payne filed suit against June Moudy, Kenneth R. Scalf, an employee of Gay & Taylor, Inc., and Richard L. Browder, alleging that, while his vehicle was stopped in a line of traffic, the defendants Scalf and Browder drove their vehicles into each other in such a manner as to cause the vehicle driven by Moudy to collide with the rear of Payne’s vehicle. He sought damages against each of the defendants jointly and severally. Each of the defendants cross-complained against the others for contribution. On August 18, 1977, Payne’s attorney dismissed the action as to Browder only. On August 29, 1977, Payne executed a release of Browder containing the following statement:

This release is solely to Richard Browder and Dairyland Insurance Company, and is not intended to, and does not, in any way affect the liability of any other party (all rights against all other parties being expressly reserved).

When the case was tried in November, 1977, the jury, by answers to interrogatories, found that Moudy and Browder were not negligent, but that Scalf was, and that Payne’s total damages were $20,000.00.

In their cross-complaint against Browder, Scalf and Gay & Taylor, Inc. had alleged that:

Should recovery be had against him, they should have judgment over against such other defendant or defendants as may be found to be negligent in the proportion of that defendant or defendants’ negligence.

Browder’s answer denied that Scalf or Gay & Taylor, Inc., was entitled to any judgment against him and he cross-complained against them for the payment of any judgment rendered against him, pursuant to the Uniform Contribution Among Joint Tortfeasors Act of Arkansas.

The trial court held that Browder, in having been found not negligent, was not a joint tortfeasor, and that Scalf and Gay & Taylor, Inc., were not entitled to credit for the $10,000 paid Payne on behalf of Browder. Scalf and Gay & Taylor, Inc., paid $10,000 toward satisfaction of the judgment and appealed from that part of the judgment in excess of that amount. Browder also appeals, contending that, if Scalf and Gay & Taylor, Inc., are entitled to credit for the $10,000 paid by him, he is entitled to contribution from Scalf and Gay & Taylor, Inc.

All parties concede that Ark. Stat. Ann. § 34-1004 (Repl. 1962) is the controlling statute. It reads as follows:

A release by an injured person of one joint tortfeasor, whether before or after judgment, does not discharge the other tortfeasors unless the release so provides; but reduces the claim against the other tortfeasors in the amount of the consideration paid for the release, or in any amount or proportion by which the release provides that the total claim shall be reduced, if greater than the consideration paid.

Appellants rely upon the case of Coleman v. Gulf Refining Company of Louisiana, 172 Ark. 428, 289 S.W. 2, and our quoting with approval the following language from Cleveland v. City of Bangor, 87 Me. 259, 32 A. 892:

But, with regard to the point under consideration, no sound reason has been given, and it is believed none can be assigned, for such a distinction between the case of wrongdoers who are jointly and severally liable and those who are only severally liable for the same injury. In either case the sufferer is entitled to but one compensation for the same injury, * * *

Appellant also theorizes that the total judgment for $20,000 should be reduced by the $10,000 paid by Browder.

The definition of joint tortfeasors for the purposes of our version of the Uniform Contribution Among Tortfeasors Act is contained in Ark. Stat. Ann. § 34-1001 (Repl. 1962). It provides:

“Joint Tortfeasors” defined — For the purpose of this Act [§§34-1001 - 34-1009] the term “joint tortfeasors” means two [2] or more persons jointly or severally liable in tort for the same injury to person or property, whether or not judgment has been recovered against all or some of them.

We cannot agree with the appellants that Browder was a joint tortfeasor. It may well be true that the question of the joint or common liability of joint tortfeasors is determined as of the time the cause of action accrues and not at the time when the right to recover contribution is asserted, but the jury, by its verdict, obviously found that Browder was neither jointly nor severally liable for the injury to Payne. There simply is no way under the statutory definition that Browder can be considered as a joint tortfeasor. The fact that he was willing to pay for a release from “all claims, demands, damages, actions, rights of action, of whatever kind or nature which I/We now have or may hereafter have arising out of, in consequence of or on account of all injuries to persons, including those known and unknown, developed or undeveloped, and unforeseen or unexpected developments and consequences of known injuries and damage to property resulting to me/us in any way from an accident which occurred on or about the 23rd day of March, 1976, at El Dorado, Arkansas,” did not make him a tortfeasor. The release also contained a clause stating that the sum was paid as a compromise and settlement of the dispute between the parties as to whether Browder was liable and another that the payment of the sum was not to be construed as an admission of any liability.

None of the cases cited by appellants have any bearing on this question. There has been no admission of liability by Browder. Scalf and Gay & Taylor, Inc., have had full opportunity to show that Browder was guilty of negligence which was a proximate cause of Payne’s damages. They failed to do so. The closest approach to this situation, among the cases cited by appellants, is found in Walton v. Tull, 234 Ark. 882, 356 S.W. 2d 20. That case is readily distinguishable, however. There we said that evidence of the settlement agreement between the plaintiff and one of the codefendants was properly excluded from evidence because it would have informed the jury that one of the codefendants had admitted liability and it could have been the basis for argument that plaintiff had accepted the amount of the settlement as fair compensation for his injuries. Not only was there no admission of liability here, as there was there, but there was a finding of no liability here, while the tortfeasor who made the settlement in Walton was found to have been guilty of negligence which was a proximate cause of plaintiff’s injury in the ratio of 60%, with the other 40% being divided among three other parties.

We approached the matter much more closely in Welter v. Curry, 260 Ark. 287, 539 S.W. 2d 264. There we said:

We can only assume that appellant’s contention is based upon the objections registered in the trial court, even though appellant may have abandoned the contention that she is entitled to either indemnity or contribution from the parents. If she were, the failure to submit the interrogatories requested would have been a clear abuse of discretion. But we have found no basis for either contribution or indemnity in this case. Appellant was not entitled to contribution, because the parents were not joint tortfeasors with appellant under the Uniform Contribution Among Tortfeasors Act. Ark. Stat. Ann. § 34-1001 et seq. (Repl. 1962). It seems to be well settled that there is no right to contribution under the act from one who is not liable in tort to the injured person. Ark. Stat. Ann. §§ 34-1001, 1002; Annot., 34 A.L.R. 2d 1107 (1954). Before the statute comes into play, there must be a common liability to an injured party, and the injured party must have a possible remedy against both the party seeking contribution and the party from whom it is sought. * * * It is clear that these minor plaintiffs had no remedy against their parents. * * * [Citations omitted.]

Courts in other jurisdictions have taken the position that the injured party’s right to recover from the party with whom the settlement was made must be established. In Swigert v. Welk, 213 Md. 613, 133 A. 2d 428 (1957), it was held that before a tortfeasor, against whom judgment is rendered, is entitled to a reduction of judgment or contribution from one who has settled with the injured party, there must be a showing, in one way or another, of negligence on the part of the party released by the settlement. In Davis v. Miller, 385 Pa. 348, 123 A. 2d 422 (1956), it was held that the judgment against a tortfeasor could be reduced by reason of a settlement by the injured party with a third party only if it could be established that the third party was a tortfeasor. This appellants failed to do, after full opportunity to do so. The mere fact that appellee may have recovered more damages than he actually suffered cannot be taken advantage of by Scalf and Gay & Taylor, Inc., when the jury found that the negligence of Scalf was the sole proximate cause of Payne’s damages of $20,000.

The judgment is affirmed.

We agree. Harris, C.J., and Holt and Purtle, JJ.


author: Conley Byrd, Justice.

text:
    Moses NEWTON and Bill FITZGERALD v. Felix Allen CLARK
    79-30
    582 S.W. 2d 955
    Opinion delivered July 2, 1979
    (In Banc)

      Shackleford, Shackleford & Phillips, P.A. and Johnson & Tarvin, for appellants.

      Griffin, Rainwater & Draper, for appellee.
   Conley Byrd, Justice.

Appellee Felix Allen Clark was injured when he drove his pickup truck into the rear of a loaded log truck stalled on the Ouachita River Bridge on Highway No. 82. The collision occurred about dark and during a heavy thunderstrom. The log truck, a battered and beaten 1968 model Chevrolet with no tail lights, was owned and operated by appellant Moses Newton. Appellee brought this action against appellant Moses Newton and appellant Bill Fitzgerald, a contractor or timber dealer for Georgia Pacific Corporation. The theory of liability of appellant Bill Fitzgerald was based upon the allegation that he was negligent in contracting with appellant Moses Newton because Moses Newton was an incompetent contractor to haul logs. The jury found the issues in favor of appellee and assessed the damages at $155,000.

To understand Fitzgerald’s contention that he is entitled to a directed verdict because Newton was not an independent contractor, it is necessary to understand the method employed by Georgia Pacific Corporation to obtain a supply of logs for the use of its paper mill operations. The record shows that Georgia Pacific Corporation does not purchase logs directly from the people who actually cut and deliver the logs, instead Georgia Pacific contracts with a number of people such as appellant Fitzgerald to supply Georgia Pacific with logs. The contract covers logs that are cut from lands owned by Georgia Pacific and lands of other owners generally through deals made by the contractor or dealer such as Fitzgerald. The contractor or dealer in turn either contracts or employs producers to cut the logs from the designated areas at so much per cord. When the producer hauls the logs to the mill, the loaded truck is weighed unloaded, and then weighed again by Georgia Pacific. Georgia Pacific issues a ticket to the producer showing the number of cords of wood delivered, the contractor for whom the producer is working, and the zone from which the wood is cut. The producer in turn presents the ticket to the dealer and receives a check from the dealer for the cords of wood delivered at the price the dealer is paying for pulpwood. The price paid for pulpwood by the different dealers is generally the same and is generally known throughout the area. The dealer makes his profit between the price he pays for each cord and the amount per cord that Georgia Pacific pays him. The price that the dealer receives from Georgia Pacific is not a general known fact. Fitzgerald had four regular producers with whom he contracted to cut the logs from the areas he had marked and designated. However, appellant Newton was not among Fitzgerald’s regular producers.

The record shows that Moses Newton does not cut logs from lands marked and designated by Fitzgerald or any of the other contractor dealers. Newton makes his own arrangements with a landowner to cut logs and when he gets a load ready to go, he hauls the logs to Georgia Pacific’s mill. The only reason Newton has any contact with Fitzgerald is that Georgia Pacific will not accept the logs unless they are credited to a contractor or dealer. Over the years Newton has called out the name of Fitzgerald or C. P. Johnson, another contractor dealer. Fitzgerald does not know that Newton is hauling logs until Newton presents his ticket for payment. During the calendar year 1975, Newton delivered four loads of logs (one on 9/18/75, two on 11/18/75 and one on 11/14/75). Newton hauled one load on January 12, 1976 and had hauled one load prior to noon on March 4, 1976. Appellee Clark was injured on March 4,1976 when Newton’s truck blew up on the Ouachita River Bridge while attempting to deliver the second load. Newton finally delivered the latter load to the mill on March 6, 1976. Fitzgerald paid the tickets for the delivery of each load when the tickets were presented.

Based upon the foregoing record the trial court should have directed a verdict for Fitzgerald for we agree with appellant Fitzgerald that Newton was not an independent contractor — i.e. Newton was a supplier of logs as far as Fitzgerald was concerned, Restatement of Agency §14K. In other words, Newton was not hired to perform services for Fitzgerald. Rather at the time of the collision between appellee Clark and Newton’s truck, the logs belonged to Newton and Fitzgerald had no obligation with respect to the logs until such time as the logs were delivered to the mill and Newton selected Fitzgerald as the contractor dealer to receive credit for the logs delivered.

For still another reason, we agree with appellant Fitzgerald that he was entitled to a directed verdict — i.e. there is no evidence that Moses Newton was an inocompetent contractor, even if we assume that Moses Newton was an independent contractor. The proof shows that Newton had been engaged in cutting and hauling pulpwood most of his life. Newton had hauled logs under the same arrangement for two or three years and had been paid by Fitzgerald and so far as the record shows without incident. Appellee to avoid our holding in Western Arkansas Telephone Company v. Cotton, 259 Ark. 216, 532 S.W. 2d 424 (1976), contends that there is no testimony or other evidence revealing that Fitzgerald’s past experience with Newton had been successful or even satisfactory. In attempting to avoid the holding in Western Arkansas Telephone Co. v. Cotton, supra, that a contractor cannot be held liable on the theory of negligent selection of an independent contractor where the contractor had had previous successful experience with the independent contractor, appellee wishes to place the burden of proof upon appellant Fitzgerald of showing that the previous experience was successful. However, the burden of proof was upon appellee to prove that Fitzgerald either knew or should have known that Newton was incompetent in some manner and that his injuries arose out of that characteristic which rendered Newton incompetent to do the work and appellee by a mere showing of prior expereince between the contractor and the independent contractor cannot shift the burden of proof to the contractor to show that the prior experience was successful — i.e. the burden was upon appellee to show that such prior experience was other than successful. Furthermore, with respect to the particular characteristic of Newton, which appellee contends made Newton incompetent — i.e. the awareness of Newton regarding proper emergency procedures on the highway — there is a dispute in the evidence as to whether Newton put out the proper warning devices. The fact that the jury found Newton negligent with respect to this particular incident does not raise a presumption that Fitzgerald had notice or knowledge that Newton was incompetent with respect to his obligations of displaying emergency warnings.

Moses Newton has also appealed contending that the trial court erred in permitting appellee to show that a blood test ordered by a State Policeman pursuant to Ark. Stat. Ann. § 75-1045 (c)(2) could be introduced without complying with The requirements of Ark. Stat. Ann. § 75-1045(c)(2) — i.e. that the blood was withdrawn under the supervision of a licensed physician and that the testing method had been approved by the State Health Department.

The record shows that after leaving work at 5:00 p.m. appellee had consumed one beer with his brother. Just before the collision, appellee had been to a package store to obtain some additional beer. He admits that upon leaving the package store, he had opened one can of the beer for the purpose of drinking the same. The record does not show what part, if any, of the last can was consumed. However, the medical technologist, George'Roberts, who performed a test on the blood allegedly drawn from appellee, at the request of the State policeman, testified that it contained 0.0% of alcohol.

To uphold the action of the trial court in admitting the blood test, appellee contends that the provisions of Ark. Stat. Ann. § 75-1045 (c)(2) supra, are solely for the benefit of the driver and that the driver of the automobile can waive the requirements as to the method of withdrawing the blood and the method of testing. We disagree with appellee in his interpretation of the statute. It appears to us that the requirements were placed in the statute, supra, to assure the public and the driver that they could rely upon the tests in connection with highway safety in general. Newton, as a member of the public, has a right to expect that such tests ordered by the State Police will also be reliable. It follows that the trial court erred in admitting the blood test into evidence.

Newton also contends that the verdict is excessive but in view of the reversals for the reasons set forth above, we need not reach that issue.

Reversed and remanded.

Harris, C.J. and Hickman, J., would affirm.


author: Frank Holt, Justice.

text:
    Leon J. GAROT v. Bob HOPKINS & Archie COATES
    79-35
    583 S.W. 2d 54
    Opinion delivered July 2, 1979

      George E. Pike, for appellant.

      Harold W. Madden and John T. Harmon, for appellees.
   Frank Holt, Justice.

On March 10, 1977, appellees exercised a 40 day option to purchase approximately 581 acres of land from appellant. Appellees agreed to pay a total price of $232,400. A down payment of $11,620 was made, and an installment note was executed providing that appellees would pay the balance over a 10 year period at the rate of $32,852.06 annually. The written contract was silent as to a date of possession by the appellee purchasers. They instituted this action on March 6, 1978, alleging mutual mistake of material fact as to the time of possession in the execution of the sale agreement and sought rescission of the contract and refund of the $11,620 down payment. The court found mutual mistake, which justified a rescission of the agreement and a refund of appellees’ down payment. Appellant first asserts that the chancellor erred in admitting oral testimony to vary the terms of the written contract.

Although parol evidence is generally not admissible to vary the terms of a written instrument, it is admissible to show mutual mistake. See Sewell v. Umsted, 169 Ark. 1102, 278 S.W. 2d 36 (1925); Roger v. Jack Collier East Co., 257 Ark. 205, 515 S.W. 2d 205 (1974); Kansas City & M. Ry. Co. v. Smithson, 113 Ark. 305, 168 S.W. 555 (1914). Here the pleadings raised the issue of mutual mistake concerning delivery of possession and the duration of the lease encumbering the property. The court correctly held that parol evidence was admissible on the issue presented.

We must agree however with appellant’s next contention that the evidence is insufficient to support a finding of mutual mistake. It is well established that we review chancery cases de novo on appeal, and we do not reverse the chancellor’s findings of fact unless contrary to the preponderance of the evidence. Here the property is used primarily as a hunting club. The appellees discussed with the appellant the purchase of his property with the intent of resale by them. During negotiations, they discussed the existence of a hunting club lease on the property. Appellees examined the property prior to execution of the sale contract. Admittedly, they knew there were tenants on the property during the hunting season and there was a lease encumbering the property. Even so, the appellees drafted the written sale contract and made no reference to the lease, its terms, or when appellees would get possession of the property. According to the appellees, this omission resulted from being assured by the appellant that the lease was to expire at the end of May, 1977, or 2 months following the date of the purchase contract. They asked to see the lease before the contract was signed. They were told initially that it was in the bank, where appellant was a director, and later that he could not find it. Appellant had asked them not to contact his tenants as he did not want them to know he was selling the property. Shortly after signing the contract, appellees learned that the lease was in force until 1982. A witness for appellees testified that he was in his office across the hall from appellees’ office and overheard a conversation on March 10, 1977, the day the contract was signed, in which appellees told appellant that they could not purchase the property unless the lease were up at the end of May, 1977; appellant told them the lease would terminate at that time; and appellant was going to write a letter to the tenants advising them to vacate. It appears that appellees had listed the property for sale, during the option period and after the contract to purchase, in local and out-of-state publications, sent prospective purchasers resumes of the hunting club facilities and represented the hunting club lease would terminate in May, 1977.

Appellant’s version is that appellees examined the property with him in January, 1977. He told appellees that the existing lease on the property was in writing. He also told them that the lease was to expire in 1982, although he originally told them he wasn’t sure when the lease expired. Even though the lease did not expire until 1982, he never promised possession, except subject to the lease. He pointed out that the purchase contract itself provides that he was not obligated to give appellees a warranty deed for the property for a period of four years. Shortly after execution of the sale contract with appellees, he gave notice to the hunting club that he was cancelling its lease due to the club’s violation of certain provisions of the lease. When those notices did not prove fruitful, appellant filed suit to cancel the lease, which litigation was pending at the time of the trial of the present case.

Appellees argue that the fact that the lease did not expire until 1982 prevented them from reselling the property and that it was not until they realized that appellant could not deliver possession for a number of years that they demanded rescission of the contract and their money back. Appellant responds that the argument by appellees is essentially that the lease clouded the title to the property; their argument ignores the fact that he was not obligated to give a warranty deed to appellees for four years by the written terms of the sale agreement and, thus, the property could not be sold in fee by appellees until that time. In other words, what appellees really complain about is that a third person could not take possession of the property, and, therefore, appellees cannot sell the property at this time at a profit.

Appellees are experienced real estate men. They contracted to purchase the property knowing it was leased by a hunting club. They failed to mention the lease in the contract, drafted by them, its duration or any date as to delivery of possession of the property. They were buying the property for resale primarily as a hunting club. Under the very terms of the written contract, they were not to receive a warranty deed from appellant for 4 years. Also the contract provided for a 10 year payout period without the right of prepayment. It is true that they made written demand for a refund of their down payment in May and June, 1977. However, they waited for more than a year, or shortly before the annual payment was due, to file this action for rescission of the contract. Appellant was and is willing to give possession subject to the lease. Appellees admitted that the omission in the contract they drafted as to a date of possession was “foolish.”

In the circumstances, we hold that the finding of the court was against the preponderance of the evidence.

Reversed and remanded with directions to enter a decree not inconsistent with this opinion.

Byrd, J., dissents.


text:
    Margie SAUNDERS, Administratrix of The Estate of John SAUNDERS, Deceased v. NATIONAL OIL LINE INSURANCE CO.
    79-53
    583 S.W. 2d 58
    Opinion delivered July 2, 1979
    (Division II)

      James M. Pratt, Jr., of Brown, Compton & Prewett, Ltd., for appellant.

      Otis H. Turner of McMillan, Turner & McCorkle, for appellee.
   Frank Holt, Justice.

This appeal results from the court granting appellee’s motion for summary judgment. The sole issue is whether appellant’s decedent, John Saunders, was in “good health” at the time of the issuance and delivery of the credit life insurance policy.

Saunders made written application on December 17, 1974, to appellee for a $10,000 credit life insurance policy. A physical examination was required and on December 31, 1974, Dr. Charles Avery submitted his favorable examination report to appellee. On January 9, 1975, appellee issued its insurance policy on Saunders. The letter of transmittal, attached as part of the policy, bore the date of January 10, 1975. On January 9, at 6:15 a.m., Saunders was admitted to a local hospital because of an enlarged abdominal mass and abdominal pain which became apparent about one week prior to his admission. The provisional diagnosis was hepatomegia. Saunders remained in the local hospital until January 14, 1975, when he was transferred to a Texarkana hospital where he died on June 9, 1975, of generalized car-cinomatosis as a consequence of carcinoma of the liver. Appellee denied appellant’s claim for the proceeds of the policy. Appellant then brought this action.

The policy of insurance issued by appellee to John Saunders included the following provision:

I understand and agree that there shall be no insurance in force until the policy hereby applied for is issued and delivered to me during my lifetime and good health and the first premium is paid by me, in which event the insurance shall be deemed effective as of the date of issue stated in the policy.

Appellee asserted, in its motion for summary judgment, that under the undisputed facts, Saunders could not have received the policy “during his lifetime and while in good health: that this language and requirement was a condition precedent to the policy becoming effective and, therefore, the said policy never became a binding and enforceable contract of insurance.” It attached, as exhibits to the motion, copies of the application for insurance containing the recited provision, the admission summary sheet from the local hospital reflecting Saunders’ admission and provisional diagnosis, the personal history and physical examination sheet of Saunders taken from the hospital record, and Saunders’ death certificate.

Appellant argues that when a condition precedent, as here, involved a requirement that the insured be in good health at the time of issuance and delivery of the policy, the determination of his health at that time should be a fact question for the jury. Therefore, summary judgment is precluded. Appellant acknowledges that a summary judgment is proper where it is clear that there is no genuine issue of fact to be litigated. Purser v. Corpus Christi State National Bank, 258 Ark. 54, 532 S.W. 2d 187 (1975), A summary judgment is proper when the moving party is entitled to a judgment as a matter of law, there is no issue as to any material fact and, even though the facts are undisputed, reasonable men could draw only one conclusion from them. Arnold v. All American Assurance Co., 255 Ark. 275, 499 S.W. 2d 861 (1973).

The facts in the case at bar are undisputed. Appellee’s prospective insured entered a hospital with a fatal illness prior to the delivery of the policy. At the time he entered the hospital, he had suffered for at least a week from abdominal pains and had noticed a swelling of his abdomen. Upon admission he was provisionally diagnosed as having a possible carcinoma of the liver with hepatomegaly. He died less than six months later of generalized carcinomatosis due to carcinoma of the liver. We cannot say that reasonable men could draw a conclusion from this set of facts other than Saunders was not in good health at the time of issuance and delivery of the policy. The motion for summary judgment was, therefore, properly granted.

Affirmed.

We agree: Harris, C.J., and Hickman and Purtle, JJ.


text:
    Margaret Elaine BAIRD v. STATE of Arkansas
    CR 79-86
    583 S.W. 2d 60
    Opinion delivered July 2, 1979
    (Division II)

      Charles E. Hanks, for appellant.

      Steve Clark, Atty. Gen., by: Catherine Anderson, Asst. Atty. Gen., for appellee.
   Frank Holt, Justice.

Appellant was charged with “overchecking” or giving a $69.71 check without sufficient bank funds. Ark. Stat. Ann. § 67-720 (Supp. 1977). The jury found her not guilty by reason of a mental disease or defect. About a week later, pursuant to Ark. Stat. Ann. § 41-612 (1) (Repl. 1977), the court conducted a post-acquittal hearing and found that appellant was not then affected by mental disease or defect and did not present a danger to herself or to another person or to the property of others. The court discharged appellant from custody with respect to this case. However, since there were numerous outstanding local felony warrants for the same offense against appellant, she was ordered delivered to the local sheriff. Appellant asserts that the court erred in discharging her rather than ordering her committed to the custody of the director of the State Hospital to be placed in an appropriate institution. This is an issue of first impression.

§ 41-612 provides that when a defendant is acquitted on the ground of a mental disease or defect, the court shall order her committed to the Director of the State Hospital if the court finds the defendant is affected by mental disease or defect and presents a risk of danger to himself or to the person or property of others. If the court finds the defendant is affected by mental disease or defect and, however, no longer presents a danger to himself or the person or property of others, it shall order him discharged or released on such conditions as the court deems appropriate. The court may base its findings on the psychiatric report submitted prior to trial pursuant to § 41-605, the medical evidence presented at trial, or medical evidence submitted at a separate post-acquittal hearing. Whatever the basis for the court’s findings, the burden is upon the state to prove, by a preponderance of the evidence, that the defendant should be either committed or conditionally released. The Commission, in drafting this statute, rejected the suggestion that all persons found not guilty by reason of mental illness should be hospitalized, if at all, under normal civil commitment laws. Commentary, Ark. Stat. Ann. § 41-612 (Repl. 1977). Here at the post-acquittal hearing, appellant did not resist commitment. To the contrary, she sought the assistance of the court, urging it to commit her for her own good.

Dr. Jenkins, the state’s witness testified at trial that he diagnosed appellant as having a hysterical personality disorder. He stated that a personality disorder is a disorder “in which one’s general functioning is beyond the realm of normality and it’s a life-long kind of pattern . . .” In his opinion appellant has the capacity to conform her acts to the requirements of the law, and she appreciates the criminality of her conduct. However, when faced with a crisis situation, her judgment goes totally “kaput.” Her mental defect is certainly contributory. He recognized that appellant has a longstanding history of psychiatric difficulties which contribute to her behavior.

Dr. Finch, a defense witness, testified that he diagnosed appellant as psychoneurotic with severe chronic depression, self-destructive acting-out behavior, some obsessive compulsive component, and a great deal of anxiety. Psychoneurosis is a mental disease. He felt that, although appellant could appreciate the criminality of her behavior, the particular crime involved here was a result of her neurosis or mental disease. He repeatedly stated that appellant was “crying for help.” She had attempted suicide 3 times. However, he indicated that she had, in his opinion, two conflicting traits since she was a teenager; she has a very low self-esteem so that she seeks punishment and cries out for help at the same time. He also stated that imprisonment would not be of any help in the treatment of her illness unless she received psychiatric treatment. It is undisputed that appellant has intermittently been under psychiatric care during the past 5 years.

The court, following the post-acquittal proceeding, stated that “the problem in this case arises from the fact that the jury, in the Court’s mind, made a mistake, because both doctors at the trial testified that she was not psychotic, that she did understand right from wrong.. ..” We observe this is not the statutory test. The test is whether appellant was suffering from a mental disease or defect and is dangerous to herself or others or their property. Both psychiatrists testified that appellant suffered from psychoneurosis or a personality disorder which impairs her normal functioning in society. In addition Dr. Finch stated that she evinced severe depression and self-destructive behavior. Her low self-esteem caused her to seek out punishment, yet she repeatedly cried out for help. As indicated, on 3 occasions she has attempted suicide.

In the circumstances, we hold that the evidence preponderates in showing that appellant is suffering from a mental disease, at least to the degree that she is dangerous to herself. The judgment is reversed and the cause remanded with instructions to commit appellant into the custody of the Director of the State Hospital.

We agree: Harris, C.J., and Fqgleman and Purtle, JJ.


author: Darrell Hickman, Justice.

text:
    Nancy Helen NEHRING v. Aubrey Thomas TAYLOR
    79-42
    583 S.W. 2d 56
    Opinion delivered July 2, 1979
    (In Banc)

      Walters, Davis & Cox, by: James 0. Cox, for appellant.

      Wiggins, Christian & Gamer, by: Eddie JV. Christian, for appellee.
   Darrell Hickman, Justice.

This appeal from the Sebastian County Chancery Court involves the registration of a Texas divorce decree and the enforcement of it.

The appellant, Nancy Nehring, formerly Nancy Taylor, was granted a divorce from the appellee, Aubrey Taylor, in 1974 by a Texas court having jurisdiction over the parties and cause. The decree granted the appellant a 43% interest in the appellee’s U.S. Air Force retirement benefits (his pension). Texas recognizes such benefits to be community property subject to a division in a divorce case. Cearley v. Cearley, 544 S.W. 2d 661 (Tex. 1976); United States of America v. Stelter, 567 S.W. 2d 797 (Tex. 1978).

The appellant later petitioned the Texas court to find the appellee in contempt of court for failure to pay over the retirement benefits as ordered. The Texas court found the appellee in contempt of court for failure to pay the benefits and ordered the appellee confined 90 days in jail. The court ruled that the appellee could purge himself of contempt by signing an irrevocable letter of allotment, filing it with the appropriate federal agency, and paying the arrearages and costs.

The appellee apparently moved to Arkansas before the Texas order could be executed.

The appellant filed the Texas decree and contempt order with the Sebastian County Chancery Court seeking registration of the decree and order as foreign judgments. This is as provided for in Ark. Stat. Ann. § 29-801, et seq. (Repl. 1962).

The appellee was personally served with notice as required by law and, after issue was joined, the chancellor entered an order registering the decree and order, but withholding execution until a hearing could be held. The appellant then filed a petition with the Sebastian County Chancery Court asking that the appellee be held in contempt for refusal and failure to comply with the Texas decree and order.

After a hearing, the chancellor found the appellee to be in arrears and obligated to pay the sum of $1,792.01, for which judgment was granted. Also, the appellee was found in contempt for failure to comply with the orders of the court and sentenced to 30 days in jail — he could purge himself of contempt by paying the amount adjudged owned. All further requests of the appellant for relief were denied and the cause was dismissed, the matter being referred back to the Texas court.

The appellant argues the chancellor should have adopted the Texas contempt order as its own; that is, the 90 day jail sentence and order for the appellee tos sign an allotment should have been recognized as a foreign decree entitled to registration and enforcement.

The order of the chancellor is somewhat ambivalent. First, it accepts the Texas decree and contempt order as being entitled to registration; it finds an arrearage due; and it finds the appellee in contempt for violation of the Sebastian County Chancery order, and sentences the appellee to 30 days in jail. Finally, it dismisses the matter.

We can only fairly conclude that the chancellor accepted the Texas decree as one subject to registration, and reduced the arrearage due to judgment. The court then ordered the appellee to pay the arrearage and when he failed to do so, held the appellee in contempt. Apparently the court declined to adopt the Texas order of contempt requiring the allotment to be signed.

The trial court correctly refused to accept the Texas contempt order as a foreign decree entitled to full faith and credit. We said in Stilley v. Stilley, 219 Ark. 813, 244 S.W. 2d 958 (1952):

It is a well established rule that the power to judge a contempt rests exclusively with the court contemned, and that no court is authorized to punish a contempt against another.

The chancellor was also correct in ordering the registration of the Texas decree as being one entitled to full faith and credit. Leflar, The New Uniform Foreign Judgment Act, 3 Ark. L. Rv. 402 (1949). Once it was registered, the trial court had the authority to treat the Texas decree as its own and enforce it by contempt proceedings. Holley v. Holley, 264 Ark. 35, 568 S.W. 2d 487 (1978). (For the extent of a chancellor’s authority in a contempt proceeding, see Harrison v. Harrison, 239 Ark. 756, 394 S.W. 2d 128 (1965)).

In other words, the chancellor was not bound to accept the contempt order from Texas and required to execute it as it provided; however, the chancellor could have, in her discretion, for good cause, entered a like contempt order for disobedience of an order she entered.

The trial court was wrong in dismissing the case. While some jurisdictions do not favor registration of a foreign decree requiring future payments, such as alimony or child support, we favor that view. Holley v. Holley, supra. See also, ALR 2d, Later Case Service (1959), 18 ALR 2d 862-877, § 5. Otherwise, parties could never, as a practical matter, enforce judgments and decrees if one party left the state of original jurisdiction. It should not be necessary to go back to the original state, petition for judgment, then take the judgment to another state for registration and enforcement, as arrear-ages accrue. Once a decree or judgment is accepted as proper for registration, then it becomes in effect an Arkansas judgment, and will remain on the judgment books to be enforced by Arkansas in the future.

Therefore, the matter is remanded, with instructions for the chancellor to reinstate the Texas divorce decree, to be treated as an Arkansas decree. Otherwise, the judgment is affirmed.


text:
    Mikel Wayne HOUSTON v. STATE of Arkansas
    CR 79-55
    582 S.W. 2d 958
    Opinion delivered July 2, 1979
    (Division I)

      John W. Achor, Public Defender, by: James Phillips, Deputy Public Defender, for appellant.

      Steve Clark, Atty. Gen., by: Robert J. DeGostin, Jr., Asst. Atty. Gen., for appellee.
   Darrell Hickman, Justice.

Mikel Wayne Houston was convicted of rape by forcible compulsion in violation of Ark. Stat. Ann. § 41-1803 (Repl. 1977) and sentenced to 20 years’ imprisonment.

On appeal his counsel alleges only one error: the trial court should have allowed the introduction of evidence regarding the victim’s reputation and prior sexual conduct. The trial judge properly excluded the evidence and we affirm the judgment.

Houston, age 25, was charged with raping a 16 year old girl. The victim testified that she and Houston had a date, drove to a secluded place and Houston pulled a gun on her, forcing her to have sexual intercourse. Houston testified she consented.

Houston made a pre-trial motion requesting permission to use evidence about the victim’s reputation and prior sexual conduct.

An in camera hearing was held and testimony of witnesses recorded as provided for in Ark. Stat. Ann. § 41-1810.2 (Repl. 1977). At the private hearing, one witness said he had “messed around” with the victim; another said that he had had sexual intercourse once with the victim; testimony was offered that the victim “hung around clubs and bars.” The victim testified, and she essentially disputed all the unfavorable testimony.

The appellant argues that evidence should have been admitted because it was relevant and to impeach the victim’s credibility since she denied the essence of the proffered testimony. Ark. Stat. Ann. § 41-1810.1 (Repl. 1977) specifically prohibits the introduction of such testimony and further states such evidence:

... is not admissible by the defendant, either through direct examination of any defense witness or through cross-examination of the victim or other prosecution witness, to attack the credibility of the victim, to prove consent or any other defense, or for any other purpose.

The statute, then, clearly prohibits the use of such evidence for the reasons argued by Houston. The trial court ruled the evidence was not relevant and we cannot say that decision was clearly erroneous.

Houston was permitted to file his own separate pro se brief in this case. He makes essentially the same arguments as his counsel. However, he also makes allegations of ineffective assistance of counsel. We will not consider that issue because it was not raised at the trial level. Hilliard v. Stale, 259 Ark. 81, 531 S.W. 2d 463 (1976).

However, relief under rule 37, Rules of Criminal Procedure, is not precluded.

Affirmed.

We agree. Harris, C.J. and George Rose Smith and Byrd, JJ.


author: John I. Purtle, Justice.

text:
    Donald Ray BAILEY v. STATE of Arkansas
    CR 79-89
    583 S.W. 2d 62
    Opinion delivered July 2, 1979
    (Division II)

      McHenry, Skipper & Skelton, by: Michael A. Skipper, for appellant.

      Steve Clark, Atty. Gen., by: Ray Hartenstein, Asst. Atty. Gen., for appellee.
   John I. Purtle, Justice.

Appellant and an accomplice were observed by an off-duty policeman stealing hubcaps from a parked Cadillac automobile near 6th and Main in Little Rock, Arkansas. The officer attempted to apprehend the appellant and his accomplice, Wesley, but they took off in another vehicle before the officer was able to take them into custody. The officer saw appellant with two hubcaps in his hand and what he thought was the other two hubcaps in possession of the accomplice as they fled. All four hubcaps were missing from the parked vehicle and the officer stated they threw them out the window of the car as he chased them along the highways. The officer further stated one of the fleeing men pointed a handgun at him as he chased them following the theft. Appellant denied that he pointed a gun at the officer and further stated he had never owned a gun. Therefore, the facts were in dispute.

The two were charged with Theft of Property and Aggravated Robbery. The jury returned a verdict of guilty of Theft of Property and Aggravated Robbery but also found that they did not use a deadly weapon in the incident. The court decided the verdict was inconsistent inasmuch as the jury found them guilty of Aggravated Robbery but specifically found no deadly weapon was used. The court sent the jury back to deliberate and when they returned they delivered the exact same verdict. The court accepted the second verdict and sentenced each of the defendants to 2 years for Theft of Property and 6 years on Aggravated Robbery, as recommended by the jury. Both men appealed. We have previously considered the accomplice’s appeal in Wesley v. State, 265 Ark. 406, 578 S.W. 2d 895 (1979), wherein we reversed and dismissed the conviction of Aggravated Robbery and affirmed the conviction of Theft of Property. The state concedes that the holding in Wesley is binding and they do not argue the Aggravated Robbery point. Therefore, we do not discuss it in this opinion. The other point raised by appellant on this appeal is that the evidence was insufficient to support the verdict on theft of property having a value of more than $100.

The owner of the automobile testified he replaced two hubcaps on the same vehicle from which these were stolen about a year ago at a cost of $75 for the two. The owner further testified that replacement cost for new hubcaps was approximately $340. He frankly admitted he did not know the value of four used hubcaps for his vehicle. There was no other evidence presented as to value of the property allegedly stolen.

Ark. Stat. Ann. § 41-2203 (Repl. 1977) specifies that theft of property of the value of less than $2500 but more than $100 is a class C felony. Ark. Stat. Ann. § 41-2202 (3) (Repl. 1977) defines the amount of a theft as “the amount involved in a theft shall be deemed to be the highest value, by any reasonable standard, of the property or services which the actor obtained or attempted to obtain....” In the case of Polk v. State, 252 Ark. 320, 478 S.W. 2d 738 (1972), we held that where a witness testifying as to value of stolen goods stated the value was “About a Hundred and a Half, Two Hundred” was sufficient to show the value to be in excess of $35. In a case where the owner of a watch testified that when it was given to him it had a price tag of $119 on it we held such testimony was sufficient to show the value of the property. Boone v. State, 264 Ark. 169, 568 S.W. 2d 229 (1978). Since the owner testified the value of two hubcaps was $75, and all four were taken, we feel the proof justifies a finding that the value of the property was in excess of $100. Of course, if you consider his testimony of the cost of replacement of the hubcaps, the proof is far in excess of that required to sustain a conviction under the above statute. For these reasons we affirm as to the Theft of Property and reverse and dismiss as to the Aggravated Robbery.

Affirmed in part, reversed and dismissed in part.

We agree. Harris, C.J., Fogleman and Holt, JJ.