Utah State Tax Comm'n v. See's Candies, Inc. , 435 P.3d 147 ( 2018 )

This opinion is subject to revision before final
publication in the Pacific Reporter
2018 UT 57
IN THE
SUPREME COURT OF THE STATE OF UTAH
UTAH STATE TAX COMMISSION,
Respondent-Appellant,
v.
SEE’S CANDIES, INC.,
Petitioner-Appellee.
No. 20160910
Filed October 5, 2018
On Direct Appeal
Fourth District, Utah County
The Honorable Judge Samuel D. McVey
No. 140401556
Attorneys:
Sean D. Reyes, Att’y Gen., Tyler R. Green, Solic. Gen.,
Brent A. Burnett, Asst. Solic. Gen., Clark L. Snelson,
Michelle A. Lombardi, Asst. Att’y Gens., Salt Lake City,
for respondent-appellant
Nathan Runyan, Steven P. Young, Salt Lake City,
Eric S. Tresh, Jonathan A. Feldman, Atlanta, GA,
Kelly M. Klaus, Mark R. Yohalem, Los Angeles, CA,
for petitioner-appellee
Gregory S. Matson, Helen Hecht, Sheldon H. Laskin, Bruce Fort,
Lila Disque, Washington, D.C., for amici Multistate Tax Commission
Gary R. Thorup, Salt Lake City, for amici Council on State Taxation
G. Wesley D. Quinton, Farmington, for amici
Utah Taxpayers Association
JUSTICE PEARCE authored the opinion of the Court in which
CHIEF JUSTICE DURRANT, ASSOCIATE CHIEF JUSTICE LEE,
JUSTICE HIMONAS, and JUSTICE PETERSEN joined.
JUSTICE PEARCE, opinion of the Court:
TAX COMM’N v. SEE’S CANDIES
Opinion of the Court
INTRODUCTION
¶1 See’s Candies (See’s), a Berkshire Hathaway subsidiary, sold
its intellectual property to Columbia Insurance Company, another
Berkshire Hathaway subsidiary. In return, See’s received shares of
Columbia’s stock. After the sale, See’s was required to pay Columbia
to use the See’s trade name. See’s deducted these royalty payments
from its taxable income. A tax commission auditor reviewed See’s1
tax returns and called shenanigans, concluding that the transaction
had been structured to permit See’s to improperly reduce its taxes.
Utah Code section 59-7-113 permits the Utah State Tax Commission
(the Commission) to allocate income between related organizations if
it is “necessary” to “prevent evasion of taxes” or “clearly to reflect
the income” of the corporations. And that is what the Commission
did; it allocated the royalty payment deductions back to See’s as
taxable income. This increased See’s tax liability for the audited
years.
¶2 See’s appealed that assessment to the Commission, which
decided that the allocation was appropriate. See’s then appealed that
decision to the district court, which, by statute, has the authority to
conduct a trial de novo. After trial, the district court reached the
opposite conclusion and allowed See’s to take the deductions. To
reach that conclusion, the district court analyzed section 113 to
assess when the statute authorizes the Commission to allocate
income between related companies. The Commission argued that it
had plenary authority to allocate income whenever it, in its sole
discretion, believed it was necessary to prevent tax evasion or to
make a corporation’s returns clearly reflect its income. See’s argued
that the statute should be interpreted in the same fashion as a
similarly worded provision of the federal tax code. Under that
interpretation, the Commission would be authorized to allocate
when the transaction occurs on terms more favorable than those that
two unrelated companies would reach after negotiating at arm’s
length.
_____________________________________________________________
1 Apostrophe czars and sharp-eyed grammarians may take issue
with our use of See’s as the possessive form of See’s. Although we
could write “See’s’s,” we elect not to doggedly apply grammatical
rules to the point of distraction, and instead treat See’s “as a kind of
possessive.” See Bryan A. Garner, Garner’s Modern English Usage 714
(4th ed. 2016).
2
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Opinion of the Court
¶3 The district court concluded that section 113 was ambiguous.
To resolve the ambiguity, the district court interpreted the section in
harmony with that similarly worded section of the federal tax code.
The district court credited expert testimony opining that the See’s-
Columbia transaction looked like one that two unrelated companies
would have reached. The Commission has not challenged this
finding. Based on that testimony, the district court ultimately
concluded that section 113 did not permit the allocation the
Commission had imposed. The Commission appeals.
¶4 Like the district court, we conclude that the language of
section 113 is ambiguous. We also conclude that the district court
properly looked to section 113’s federal counterpart and its
accompanying regulations for guidance. The original version of
section 113 was lifted directly from the 1928 Internal Revenue Code.
Because the Legislature modeled the original version of section 113
on its federal counterpart, we look to the federal statute’s history and
interpretation for guidance. We affirm.
BACKGROUND
¶5 See’s and Columbia Insurance Company are wholly owned
subsidiaries of Berkshire Hathaway. 2 In 1997, See’s sold intellectual
property, including its trademarks, to Columbia in exchange for
Columbia stock. The value of the intellectual property was
independently assessed at the time of the transaction, and Columbia
tendered shares that roughly equaled the value of See’s intellectual
property. As part of the transaction, Columbia and See’s entered into
a licensing agreement to permit See’s to continue using its trade
name. Under the agreement, Columbia would protect and develop
the intellectual property; See’s would pay royalties to license the
intellectual property back.
¶6 See’s deducted the royalty payments from its income as a
business expense. The Multistate Tax Commission (MTC) 3 audited
_____________________________________________________________
2 “On appeal from a bench trial, we view and recite the evidence
in the light most favorable to the trial court’s findings.” State v. Jack,
2018 UT App 18, ¶ 2 n.2, 414 P.3d 1063; see also USA Power, LLC v.
PacifiCorp, 2016 UT 20, ¶ 8 n.3, 372 P.3d 629 (“On appeal, we review
the record facts in a light most favorable to the jury’s verdict and
recite the facts accordingly.” (citation omitted)).
3The MTC filed an amicus brief in support of the Commission.
The MTC is an intergovernmental state tax agency established by the
(continued . . .)
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TAX COMM’N v. SEE’S CANDIES
Opinion of the Court
See’s deductions for the years 1995 through 1998 and concluded the
deduction was proper for various states, including Utah. The MTC
recommended a 10 percent disallowance of the deduction to
“represent an increase in Columbia’s capital and reflect See’s
business activities in the State.” The Commission accepted the
MTC’s recommendations and allowed the deduction with the 10
percent disallowance. That decision is not before us.
¶7 The Commission later audited See’s for the years 1999
through 2007 and disallowed the royalty deductions. In an
administrative proceeding, the Commission concluded that Utah
Code “section 59-7-113 precluded shifting of income through royalty
payments between See’s and Columbia since Columbia does not file
Utah corporate franchise tax returns.” 4 The Commission concluded
that the royalty deduction See’s claimed “would decrease See’s
taxable income by 75% for the audited years and thus section 59-7-
113 justified the disallowance to clearly reflect See’s income.” The
Commission did not evaluate whether the royalty was priced at
arm’s length or if there was a business purpose for the transaction,
but did state that See’s would not have entered into this deal with an
unrelated corporation.5
Multistate Tax Compact. UTAH CODE § 59-1-801.5 art. VI. The
purpose of the compact is to “[f]acilitate proper determination of
state and local tax liability of multistate taxpayers,” “[p]romote
uniformity or compatibility in significant components of tax
systems,” “[f]acilitate taxpayer convenience and compliance in the
filing of tax returns and in other phases of tax administration,” and
“[a]void duplicative taxation.” Id. art. I. Fifteen states and the District
of Columbia are members of the compact. Member States, MULTISTATE
TAX COMMISSION, www.mtc.gov/The-Commission/Member-States
(last visited September 14, 2018).
4 In Utah, insurers are taxed based on the premiums they receive,
rather than the income they generate. See UTAH CODE § 59-9-101. This
meant that Columbia did not pay tax on the money it received in
exchange for licensing See’s intellectual property back to See’s.
5 In its order, the Commission also concluded that it “does not
believe that See’s has taken the steps it did to criminally evade
taxes.” The Commission noted that “[o]ne of the outcomes of the
transactions between See’s and its sister corporations may have been
the avoidance of taxes,” but ultimately concluded that “it is not
(continued . . .)
4
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Opinion of the Court
¶8 See’s sought a trial de novo of the Commission’s assessment
in the district court. See UTAH CODE §§ 59-1-601, –602. 6 Section 113’s
meaning became a threshold question for the court. The Commission
argued that section 59-7-113 “is a stand-alone section giving the
Commission authority to reallocate income if it concludes in its
broad discretion there is a distortion of income for tax purposes or
avoidance of income,” and that the “Legislature did not intend the
statute to involve interpretation by reference to federal [Internal
Revenue Service] regulations.” See’s contended that “section 59-7-
113, being virtually identical to [Internal Revenue Code section] 482,
depends on the [Internal Revenue Service] regulations for
interpretation and application [and that] it me[t] those regulations’
requirements for taking the deduction.”
¶9 The district court concluded that the language of Utah Code
section 59-7-113 “appears to be unambiguous regarding the Tax
Commission’s ability to redistribute deductions if necessary to
clearly reflect income.” But the district court also reasoned that the
language “is less clear regarding conditions that should exist before
it undertakes that task.” The court reasoned that although the
Commission “enjoys broad discretion to adjust income . . . there
should be some law to guide how its discretion should operate in
getting [the] deductions to clearly reflect income.”
¶10 In addition, the court opined that the statutory inquiry was
“rooted in whether the transaction [between related companies] was
arm’s length.” The court concluded that
Utah income [and] franchise taxing relies heavily on
federal definitions and section 59-7-113 is itself a
virtual copy of [Internal Revenue Code] section 482,
indicating, as provided in [a] [Utah] Attorney General
Opinion and Utah case law on similar statutes cited
above, the Legislature wants to use federal guidance to
necessary that the Commission find that See’s has evaded taxes,
given the disjunctive nature of [section 113].”
6 A taxpayer may petition for judicial review of a Commission
decision. UTAH CODE § 59-1-602(1)(a). The district court reviews the
Commission’s decision de novo and gives no deference to any
previous Commission decision. Id. § 59-1-601; T-Mobile USA, Inc. v.
Utah State Tax Comm’n, 2011 UT 28, ¶ 15, 254 P.3d 752.
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TAX COMM’N v. SEE’S CANDIES
Opinion of the Court
interpret and apply the statute when dealing with
whether a transaction is arm’s length or not.
¶11 With respect to the substance of the dispute, See’s called
multiple expert witnesses at trial. See’s economist opined that “the
purpose of transfer pricing evaluation is to ensure transactions
between related parties reflect fair market pricing.” 7 He explained
that “[t]he practice . . . has a long history in sales and in application
of [Internal Revenue Code] section 482.” He concluded that “the
royalty rate See’s paid Columbia was in the arm’s length range of
royalty rates specified in” transfer pricing studies performed by an
accounting firm.
¶12 See’s also called a tax law professor to explain that “the
purpose of [Internal Revenue Code] section 482 is to put transactions
between related parties on the same footing as if they took place
between unrelated parties.” The professor also explained that “many
other states have adopted statutes which, like section 59-7-113, are
virtually identical to [Internal Revenue Code] section 482,” and other
states “refer to the [Internal Revenue Code] thus implicitly adopting
section 482.” The professor concluded that “[t]he Commission
simply exercised unfettered discretion to reach its decision unguided
by any reasonable standard.”
¶13 Through its witnesses, See’s introduced an independent
transfer pricing study prepared by an accounting firm. The study
concluded that the See’s-Columbia transaction reflected terms like
those that would be reached between unrelated parties dealing at
arm’s length. The study concluded that “[b]ased on the financial
information for the last three years . . . the net royalty payments
made to [Columbia] for these intangible assets . . . are appropriate.”
The study also noted that “[i]n evaluating the appropriateness of this
royalty rate, we confirmed that [Columbia] pays certain costs
associated with these intangible assets. This net royalty rate allows
See’s to earn a normal return on its intangible assets.”
_____________________________________________________________
7 The objective of the transfer pricing evaluation was “to analyze
a set of intercompany transactions between [Columbia] and [See’s].”
The study’s goals were “1) to evaluate the intercompany payments
between See’s and [Columbia] for the last three fiscal years and 2) to
assist See’s and [Columbia] in estimating a range of gross and net
royalty rates to be paid in the future.”
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Opinion of the Court
¶14 The court ultimately concluded that the transfer between
See’s and Columbia resembled a transaction that unrelated parties
dealing at arm’s length could have reached. The Commission
appeals.
ISSUE AND STANDARD OF REVIEW
¶15 The Commission contends that the district court erred by
interpreting Utah Code section 59-7-113 to reflect the federal arm’s
length transaction standard. The appropriate interpretation of a
statute presents a question of law that we review for correctness.
Bagley v. Bagley, 2016 UT 48, ¶ 7, 387 P.3d 1000.
ANALYSIS
¶16 The Commission contends that the district court erred by
looking to federal law to interpret Utah Code section 59-7-113. The
Commission argues that the language and history of section 113
indicate that the Legislature made a deliberate decision that federal
law should not be used to interpret section 113. See’s counters that
because section 113 is ambiguous, the district court properly
considered its federal counterpart and accompanying regulations to
define the scope of the Commission’s authority.
¶17 When faced with a question of statutory interpretation, “our
primary goal is to evince the true intent and purpose of the
Legislature.” Marion Energy, Inc. v. KFJ Ranch P’ship, 2011 UT 50,
¶ 14, 267 P.3d 863 (citation omitted). “The best evidence of the
legislature’s intent is the plain language of the statute itself.” Id.
(citation omitted) (internal quotation marks omitted). Accordingly,
“[w]hen interpreting a statute, we assume, absent a contrary
indication, that the legislature used each term advisedly according to
its ordinary and usually accepted meaning.” Id. (alteration in
original) (citation omitted).
¶18 When the meaning of a statute can be discerned from its
language, we need no other interpretive tools. Id. ¶ 15. However,
“when statutory language is ambiguous—in that its terms remain
susceptible to two or more reasonable interpretations after we have
conducted a plain language analysis—we generally resort to other
modes of statutory construction and seek guidance from legislative
history and other accepted sources.” Id. (citation omitted) (internal
quotation marks omitted).
¶19 Utah Code section 59-7-113 governs the Commission’s
authority to allocate income between corporations owned or
controlled by the same interests:
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TAX COMM’N v. SEE’S CANDIES
Opinion of the Court
If two or more corporations (whether or not organized
or doing business in this state, and whether or not
affiliated) are owned or controlled directly or indirectly
by the same interests, the commission is authorized to
distribute, apportion, or allocate gross income or
deductions between or among such corporations, if it
determines that such distribution, apportionment, or
allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any of such
corporations.
¶20 The Commission contends that section 113’s plain language
“gives the Commission broad authority to allocate income among
sister corporations if it is necessary to prevent evasion of taxes or to
correctly reflect corporate income earned in Utah.” Essentially, the
Commission argues that section 113 grants the Commission broad
ranging authority to allocate income whenever it determines that
allocation is necessary. 8
_____________________________________________________________
8 As noted above, section 113 authorizes the Commission to
allocate income or deductions when necessary “to prevent evasion of
taxes or clearly to reflect . . . income.” UTAH CODE § 59-7-113. While
the Commission’s argument relies primarily on the “clearly to reflect
. . . income” language, the Commission also briefly asserts that
“evasion of taxes” provides an alternative basis for its allocation of
See’s income.
The Commission notes that “[n]o Utah court has interpreted the
phrase ‘to prevent evasion of taxes’ in [s]ection 113.” But the
Commission does little to develop an argument as to what the
statute should mean.
Indeed, the Commission dedicates the bulk of its argument to
demonstrating that the statute draws a distinction between someone
who evades taxes and someone who willfully evades taxes. The
Commission also contends that an “intent to evade” implies “a
conscious desire to avoid a legal requirement with which the actor
knows he or she is obligated to comply” (quoting Silver v. Auditing
Div. of State Tax Comm’n, 820 P.2d 912, 915 (Utah 1991)), and that
“evade” by itself does not “suggest that evading tax means doing
something illegal.” But beyond proposing those distinctions, the
Commission has done little to shed light on the statute’s meaning.
To adequately brief an issue, an appellant’s “argument must
explain, with reasoned analysis supported by citations to legal
(continued . . .)
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Opinion of the Court
¶21 See’s argues that the meaning of section 113 is not plain
because it fails to give “clear directive on how . . . to go about
apportioning deductions to reflect income of related corporations.”
(Omission in original.) In other words, the parties agree that the
Commission can allocate income when the Commission has made a
determination that allocation “is necessary . . . clearly to reflect the
income of any of such corporations,” see UTAH CODE § 59-7-113, but
disagree about what the statute means by “necessary” and “clearly
to reflect” income.
¶22 The district court parsed the ambiguous from unambiguous
portions of the statute, reasoning that the statute “appears to be
unambiguous regarding the Tax Commission’s ability to redistribute
deductions if necessary to clearly reflect income,” but that “it is less
clear regarding conditions that should exist before [the Commission]
undertakes that task.” The court noted that the statute is silent as to
“what must happen if the Tax Commission thinks it is necessary to
disregard the general definition of taxable income to reach a
defensible redistribution clearly reflecting income.”
¶23 We agree that the phrase “necessary . . . clearly to reflect the
income of any of such corporations,” UTAH CODE § 59-7-113, is
ambiguous because it is unclear when the Commission has authority
to allocate income. The statute does not plainly speak about when it
is “necessary” for the Commission to intervene and what “clearly to
reflect” income means. In other words, did the Legislature intend
“necessary” to mean “when the Commission concludes allocation is
necessary,” or did it intend that “necessary” be anchored to some
objective standard?
¶24 Because the language is ambiguous, we start our analysis
with an inquiry into what the Legislature would have understood
the language of section 113 to mean at the time the Legislature first
placed that language in the code. See LPI Servs. v. McGee, 2009 UT 41,
¶ 16, 215 P.3d 135 (“Because the plain language of the statute is
authority and the record, why the party should prevail on appeal.”
UTAH R. APP. P. 24(a)(8). “An appellant that fails to devote adequate
attention to an issue is almost certainly going to fail to meet its
burden of persuasion.” Bank of Am. v. Adamson, 2017 UT 2, ¶ 13, 391
P.3d 196. The Commission has not given us what we would need to
interpret this language and has accordingly failed to carry its burden
of persuasion on appeal.
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Opinion of the Court
ambiguous, we turn to the legislative history to discern the
legislative intent.”).
I. The Language of Utah Code Section 113
¶25 The district court concluded that the similarity between
section 113 and Internal Revenue Code section 482 suggested that
the Legislature intended that federal guidance be used to interpret
section 113. Internal Revenue Code section 482 provides in relevant
part:
In any case of two or more organizations, trades, or
businesses (whether or not incorporated, whether or
not organized in the United States, and whether or not
affiliated) owned or controlled directly or indirectly by
the same interests, the Secretary may distribute,
apportion, or allocate gross income, deductions,
credits, or allowances between or among such
organizations, trades, or businesses, if he determines
that such distribution, apportionment, or allocation is
necessary in order to prevent evasion of taxes or clearly
to reflect the income of any of such organizations,
trades, or businesses. 9
26 U.S.C. § 482.
¶26 The Commission dismisses the notion that we can derive
any meaning from the similarity in the two provisions. Instead, the
Commission looks to other parts of the tax code and argues that
“[b]y explicitly incorporating federal tax provisions into some parts
of the Utah Tax Code—but omitting I.R.C. [section] 482 from
[s]ection 113—the Legislature manifested its intent that federal law
would not inform the Commission’s power under [s]ection 113.” The
_____________________________________________________________
9 By way of reminder, Utah Code section 59-7-113 provides:
If two or more corporations (whether or not organized
or doing business in this state, and whether or not
affiliated) are owned or controlled directly or indirectly
by the same interests, the commission is authorized to
distribute, apportion, or allocate gross income or
deductions between or among such corporations, if it
determines that such distribution, apportionment, or
allocation is necessary in order to prevent evasion of
taxes or clearly to reflect the income of any of such
corporations.
10
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Opinion of the Court
Commission reasons that because the Legislature does not cite
section 482 or its regulations in the language of section 113, the
Legislature did not intend for these provisions to be incorporated
into section 113. The Commission points to several other sections of
the tax code that “define certain Utah Tax Code terms by reference to
the Internal Revenue Code” to demonstrate that “[w]here the
Legislature has wanted to incorporate federal tax provisions into the
Utah Tax Code, it has done so explicitly.” 10
_____________________________________________________________
10 The Commission references Utah Code section 59-7-101 in
support of this argument. Section 59-7-101 does explicitly
incorporate aspects of the Internal Revenue Code by adopting
several of its definitions. See UTAH CODE § 59-7-101(23) (“‘Safe harbor
lease’ means a lease that qualified as a safe harbor lease under
Section 168, Internal Revenue Code.”); id. § 59-7-101(24) (“‘S
corporation’ means an S corporation as defined in Section 1361,
Internal Revenue Code.”). This section of the Utah Code also
references a particular federal tax credit and explains how
corporations receiving the federal credit should be treated. Id. § 59-7-
101(36)(b) (“There is a rebuttable presumption that a corporation
which qualifies for the Puerto Rico and possession tax credit
provided in Section 936, Internal Revenue Code, is part of a unitary
group.”). The Commission also points to Utah Code section 59-10-
103, which states that “[a]ny term used in this chapter has the same
meaning as when used in comparable context in the laws of the
United States relating to federal income taxes unless a different
meaning is clearly required.”
The Commission’s argument misses the mark. Each section it
references deals with federal definitions that the Legislature chose to
adopt into our own tax code. Section 113 is not a definition, nor is
“necessary . . . clearly to reflect the income of any of such
corporations” a defined term in either the Utah or federal tax code.
Although the Commission has demonstrated that the Legislature
chose to adopt certain federal definitions, the Commission has not
pointed to an operative provision of the code, similar to section 113,
where the Legislature has explicitly referenced the Internal Revenue
Code.
The Commission argues that section 59-10-103 “shows the
Legislature knew how to incorporate federal tax law by reference for
an entire chapter of the Utah Tax Code when it wanted to—and it
expressly omitted such a chapter-wide interpretive rule for chapter 7
(continued . . .)
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Opinion of the Court
¶27 See’s counters that because section 113 is “nearly identical”
to Internal Revenue Code section 482, the language of section 113
“must be understood in light of the well-established norm of
interpreting [section 113] by reference to [section] 482 and its
regulations.” 11 See’s also argues that the arm’s length transaction
standard “was encompassed by the statutory phrase ‘clearly to
reflect the income’ in federal income tax law at the time Utah enacted
virtually identical statutory language.” See’s notes that “[f]ederal tax
law governing related-party transactions had long inquired whether
a transaction was ‘market price’ instead of ‘arbitrary’ or ‘artificial,’
and when the clear-reflection language was adopted in 1928, it
embodied this ‘arm’s length’ approach.” See’s argument outlines the
more persuasive interpretation of section 113.
II. The History of Section 482
¶28 Congress enacted section 482 as section 45 of the Revenue
Act of 1928. Section 482 has remained substantively unchanged since
then. The concepts section 482 embodies, however, date back to the
War Revenue Act of 1917. See generally Pub. L. No. 65-50, 40 Stat. 300
(1917).
¶29 The War Revenue Act imposed a tax on “the income of
every corporation, partnership, or individual” in excess of the
applicable deduction. Id. at 303. The Internal Revenue Service (IRS)
promulgated a regulation requiring “every corporation [to] describe
in its return all its intercorporate relationships with other
corporations with which it is affiliated.” T.D. 2694, 20 Treas. Dec. Int.
(where [s]ection 113 is located).” Again, section 113 is not a
definition, and “necessary . . . clearly to reflect the income of any of
such corporations” is not a term defined in the Internal Revenue
Code. Further, “[i]t is usually quite beside the point that the
legislature ‘knows how’ to speak more explicitly. That is another
way of saying that the legislature could have spoken more clearly.
And typically that gets us nowhere.” Craig v. Provo City, 2016 UT 40,
¶ 38, 389 P.3d 423 (footnote omitted). In this instance, we are not
persuaded by the Commission’s argument regarding federal
references within the Utah Code.
11 See’s also points to the Legislature’s recodification of section
113 in 1993, but because we conclude that section 482 can be used to
interpret section 113, we need not address what import, if any, to
ascribe to the recodification.
12
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Opinion of the Court
Rev. 294, 321 (1918). Under the regulation, the federal tax
commissioner could require affiliated corporations to file a
consolidated return “[w]henever necessary to more equitably
determine the invested capital or taxable income.” Id.
¶30 The regulation clarified that under the War Revenue Act,
corporations were considered affiliated “when one such corporation
(a) buys from or sells to another products or services at prices above
or below the current market, thus effecting an artificial distribution
of profits.” Id. Stated differently, Congress enacted this provision to
combat transfer pricing manipulation, and the IRS aimed its fire at
transactions between related corporations on terms “above or below
the current market.” Id.; see also Reuven S. Avi-Yonah, The Rise and
Fall of Arm’s Length: A Study in the Evolution of U.S. International
Taxation, 15 VA. TAX REV. 89, 95 (1995).
¶31 In 1918, Congress amended the federal tax code. As part of
those amendments, Congress lifted the concept of giving the tax
commissioner authority to require related companies to file
consolidated returns, and transplanted it into the “Corporations”
section of the tax code. Pub. L. No. 65-254, 40 Stat. 1075, 1075, 1081
(1919). Section 240 of the Revenue Act of 1918 required “corporations
which are affiliated within the meaning of this section . . . [to] make a
consolidated return of net income and invested capital.” Id. at 1081.
¶32 The IRS then issued a regulation addressing affiliated
corporations transacting business with each other. The regulation
explained that consolidated returns are necessary to accurately
determine the invested capital and net income of the entire group of
affiliated entities. T.D. 2831, 21 Treas. Dec. Int. Rev. 170, 306 (1919).
“Otherwise opportunity would be afforded for the evasion of
taxation by the shifting of income through price fixing, charges for
services and other means by which income could be arbitrarily
assigned to one or another unit of the group.” Id.
¶33 In 1921, Congress adopted the earliest direct predecessor of
section 482. Like its 1918 progenitor, section 240 of the Revenue Act
of 1921 addressed consolidated returns of corporations. The new
section 240(d) provided that the commissioner may require a
consolidated return “in any proper case, for the purpose of making
an accurate distribution or apportionment of gains, profits, income,
deductions, or capital between or among such related trades or
businesses.” Pub. L. No. 67-98, 42 Stat. 227, 260 (1921). The Senate
report noted that section 240 was “necessary to prevent the arbitrary
shifting of profits among related businesses.” S. REP. NO. 67-275, at
20 (1921).
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Opinion of the Court
¶34 The section remained essentially unchanged until 1928,
when Congress enacted section 45, which very closely resembles the
current versions of both section 482 and Utah’s section 113. Section
45, titled “Allocation of Income and Deductions,” provides:
In any case of two or more trades or businesses
(whether or not incorporated, whether or not
organized in the United States, and whether or not
affiliated) owned or controlled directly or indirectly by
the same interests, the Commissioner is authorized to
distribute, apportion, or allocate gross income or
deductions between or among such trades or
businesses, if he determines that such distribution,
apportionment, or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income
of any of such trades or businesses.
Pub L. No. 70-562, 45 Stat. 791, 806 (1928).
¶35 Section 45 made a significant change from the prior versions.
Rather than requiring the corporate entities to file a consolidated
return, Congress gave the Commission the authority to allocate
income between related entities. See id. The House and Senate reports
explain that section 45 authorizes the Commissioner to allocate
income “as may be necessary in order to prevent evasion (by the
shifting of profits, the making of fictitious sales, and other methods
frequently adopted for the purpose of ‘milking’), and in order clearly
to reflect their true tax liability.” H.R. REP. NO. 70-2, at 16–17 (1928);
see also S. REP. NO. 70-960, at 24 (1928). Concern over “the shifting of
profits” and “the making of fictitious sales” indicates that Congress
was still aiming to deter transfer pricing manipulation between
related entities. H.R. REP. NO. 70-2, at 16–17 (1928).
¶36 During the floor discussions in the House of
Representatives, Representative Charles L. Gifford of Massachusetts
explained, in reference to the affiliated corporations section, that
“[w]hat worries us is that any two of these corporations can get
together and juggle transactions and take advantage of questionable
sales to each other to get deductions. Should it be made possible or
at least encourage one corporation to purposely sell to another to
show a loss?” 69 CONG. REC. 605 (1927). Representative William R.
Green of Iowa, in an attempt to ameliorate Representative Gifford’s
concerns, highlighted the Commissioner’s new power: “We have a
special provision in the law, section 45, that permits the bureau to
allocate the income where it belongs,” rather than allowing “these
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corporations to place the expenses just where they want to put
them.” Id.
¶37 Taken together, this history confirms that Congress
intended section 45 to provide the IRS with a tool to address transfer
pricing manipulation. The phrase, originally “for the purpose of
making an accurate distribution or apportionment of gains, profits,
income, deductions, or capital,” Pub. L. No. 67-98, 42 Stat. 227, 260
(1921), which then morphed into “necessary in order to prevent the
evasion of taxes or clearly to reflect the income of any of such trades
or businesses,” Pub. L. No. 70-562, 45 Stat. 791, 806 (1928), indicates
that it would be necessary for the Commissioner to require a
consolidated return or allocate income when corporations “mak[e]
fictitious sales,” H.R. REP. NO. 70-2, at 16–17 (1928), engage in “the
shifting of profits,” id., or, as Representative Green described it,
“place expenses just where they want to put them,” 69 CONG. REC.
605 (1927).
¶38 Section 45’s history instructs that the phrase “necessary in
order to prevent evasion of taxes or clearly to reflect the income of
any of such trades or businesses,” Pub. L. No. 70-562, 45 Stat. 791,
806 (1928), means that allocation would be necessary in
circumstances when businesses engage in transactions that parties
dealing at arm’s length would not enter. 12 Measuring a transaction’s
_____________________________________________________________
12 An early interpretation of section 45 confirms this view. The
United States Board of Tax Appeals examined a tax deduction
claimed by one company renting space from another, both of which
were “owned and controlled by identical interests.” Advance Cloak
Co. v. Comm’r of Internal Revenue, B.T.A.M (P-H) P33,078, 1933 WL
4800 (1933). The Board explained that “[t]he deductibility of the
amount of rental in question . . . must be seriously questioned, in
view of its large amount and in consideration of the fact that the two
companies are owned and controlled by identical interests.” Id.
Noting that section 45 applied, the Board concluded that “[i]t
appears that the purpose of [section 45] of the income tax statutes is
to place transactions between related trades or businesses owned or
controlled by the same interests upon the same basis as if such
businesses were dealing at arm’s length with each other.” Id. The
Board concluded that the allowance of the rental deduction resulted
in a distortion of income of both companies, “and in order that
income may be clearly reflected an adjustment of the rental
(continued . . .)
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Opinion of the Court
legitimacy against what two parties dealing at arm’s length might
reach would help Congress ensure tax parity between related
companies and non-related companies. It is this long and developed
understanding that we conclude our Legislature imported into Utah
law when it adopted section 45 into the Utah Tax Code in 1931.
III. The History of Utah Code Section 113
¶39 Utah Code section 59-7-113’s predecessor was originally
enacted in 1931 as part of the Corporation Franchise Tax Act, 1931
Utah Laws 87, 104, and has remained substantively unchanged since
then. The original version of the section, titled Section 20, “Allocation
of income and deductions,” provided:
In any case of two or more trades or businesses
(whether or not incorporated, whether or not
organized in the United States, and whether or not
affiliated) owned or controlled directly or indirectly by
the same interests, the tax commission is authorized to
distribute, apportion, or allocate gross income or
deductions between or among such trades or
businesses, if it determines that such distribution,
apportionment, or allocation is necessary in order to
prevent evasion of taxes or clearly to reflect the income
of any of such trades or businesses.
Id. at 104. Our Legislature borrowed the language of section 20
verbatim from section 45 of the Revenue Act of 1928. See supra ¶ 34.
¶40 We think it appropriate to derive meaning from our
Legislature’s choice to import a provision of federal law into our
code. Indeed, other states find significance in a state legislature’s
choice to borrow the language of a federal statute.
¶41 Some states presume that a state legislature knew of and
intended to adopt the federal interpretation of a federal statute it
deduction should be made.” Id.; see also Essex Broads., Inc. v. Comm’r
of Internal Revenue, 2 T.C. 523, 529 n.2 (1943).
Lest there be any lingering doubt about the meaning of this
language, the Treasury Department issued Regulation 86 in 1935,
which confirmed that “[t]he standard to be applied in every case
[involving section 45] is that of an uncontrolled taxpayer dealing at
arm’s length with another uncontrolled taxpayer.” Treas. Reg. 86
§ 45.45-1(b) (1935).
16
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Opinion of the Court
places in state law. For example, in California, courts “presume that
when the Legislature borrows a federal statute and enacts it into
state law, it has considered and is aware of the legislative history
behind that enactment.” Clayworth v. Pfizer, Inc., 233 P.3d 1066, 1080
(Cal. 2010). Likewise, in Iowa, when a state statutory provision is
taken from a federal statute, courts “presume [the] legislature
intended what Congress intended by the language employed.” City
of Davenport v. Pub. Emp’t Relations Bd., 264 N.W.2d 307, 313 (Iowa
1978); see also Hubbard v. State, 163 N.W.2d 904, 910–11 (Iowa 1969)
(“[W]here . . . a state legislature adopts a federal statute which had
been previously interpreted by federal courts it may be presumed it
knew the legislative history of the law and the interpretation placed
on the provision by such federal decisions, had the same objective in
mind[,] and employed the statutory terms in the same sense.”). And
when examining a state statute that has a federal analog, Iowa courts
also look to “federal court decisions construing the federal statute”
because they are “illuminating and instructive on the meaning of
[the state] statute, although they are neither conclusive nor
compulsory.” Davenport, 264 N.W.2d at 313.
¶42 Other states use a slightly different approach. Rather than
focusing on what the legislature intended when adopting the statute,
these states acknowledge that federal legislative history can be a
helpful source when interpreting state analogs. For example, in
Oregon, “[w]hen the . . . legislature adopts a statute based on federal
law, [the courts] may examine the legislative history of that federal
law for guidance in interpreting the state statute.” State v. Bowen, 380
P.3d 1054, 1061 (Or. Ct. App. 2016). Alabama, New Jersey, and North
Dakota have approached the issue in a similar fashion. See, e.g., State
Dep’t of Revenue v. McLemore, 540 So. 2d 754, 756–57 (Ala. Civ. App.
1988) (“Alabama courts, as a rule, look to federal statutory and case
construction as a source of persuasive authority where, as here, a
state income tax statute has been modeled after an existing federal
statute.”); State v. Ball, 661 A.2d 251, 258 (N.J. 1995) (“[B]ecause the
federal statute served as an initial model for our own, we heed
federal legislative history and case law in construing our statute.”);
Dominguez v. State, 840 N.W.2d 596, 601 (N.D. 2013) (“Because the
North Dakota . . . statute was modeled after and does not vary in
substance from the . . . [f]ederal . . . provision, we are guided by both
the drafter’s official comments to the proposed [federal statute] and
the relevant legislative history when we are confronted with a
question of statutory interpretation.” (citation omitted) (internal
quotation marks omitted)).
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Opinion of the Court
¶43 And we have employed a related interpretive tool when
examining legal terms of art adopted from federal law. In Utah
Stream Access Coalition v. Orange Street Development, we concluded
that “[t]he legislature’s adoption of longstanding federal
terminology is decisive.” 2017 UT 82, ¶ 21, 416 P.3d 553. “A ‘cardinal
rule of statutory construction’ says that a legislature’s use of an
established legal term of art incorporates ‘the cluster of ideas that
were attached to each borrowed word in the body of learning from
which it was taken.’” Id. (quoting FAA v. Cooper, 566 U.S. 284, 292
(2012)).
¶44 In Utah Stream Access, we reviewed a district court’s
interpretation of the term “navigable water” found in Utah Code
section 73-29-201(1)(a)(i). Id. ¶ 12. The Public Waters Access Act
defines the term “navigable water.” UTAH CODE § 73-29-102(4). But
the district court relied on the federal interpretation of “navigable
waters” to inform what our Legislature meant. Utah Stream Access,
2017 UT 82, ¶¶ 16–17 (citation omitted). We noted that the federal
definition of navigable waters is “substantially equivalent” to our
own. Id. ¶ 19. We observed that “[t]he parallelism in terminology is
striking” and that “[t]he key operative terms of both standards,
moreover, are identical.” Id. ¶ 20. Accordingly, we concluded that
“[t]he striking parallelism between the statutory definition and the
federal standard is an indication that our legislature was adopting
the ‘cluster of ideas’ in federal law.” Id. ¶ 21. 13
¶45 The idea that use of similar language indicates a legislative
intent to adopt not just the language of a federal statute, but also its
_____________________________________________________________
13 In Utah Stream Access, we “interpret[ed] the Public Waters
Access Act to incorporate the federal standard of navigability,” but
characterized the district court’s “reliance on federal cases” as
“harmless error.” Utah Stream Access Coal. v. Orange St. Dev., 2017 UT
82, ¶ 18, 416 P.3d 553; see also id. ¶ 27 (“[A]ny error in the district
court’s decision to look to federal law was harmless.”). The district
court appeared to conclude that federal law governed the question of
navigability and applied federal case law on that basis. We
concluded that “the question of ‘navigability’ under the Public
Waters Access Act is decidedly a question of state law.” Id. ¶ 16. But
we also reasoned that the state law standard “essentially mirror[ed]
or incorporate[d] the federal standard,” id. ¶ 18, and therefore
looked to the federal standard to inform our interpretation of state
law, id. ¶ 21.
18
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Opinion of the Court
accompanying “cluster of ideas,” id., dovetails with the approaches
other states have employed. Accordingly, we conclude that, absent
evidence of a contrary legislative intent, when our Legislature copies
a federal statute, federal interpretations of the statute constitute
persuasive authority as to the statute’s meaning.
¶46 Here, section 20 is a carbon copy of section 45. Because of
this similarity, and in the absence of any other signal from the
Legislature about how this language should be interpreted, it is
proper to look to the history and purpose of section 45 to guide our
interpretation of section 113. And the “striking similarity” between
the two statutes is best interpreted as a legislative signal that section
20 should function like section 45. That is, the Legislature enacted
this provision to combat transfer pricing manipulation and to
prevent affiliated corporations from gaining a tax benefit by
engaging in transactions with each other for goods or services for
prices above or below the current market, by the shifting of profits
through the making of fictitious sales, and by taking advantage of
questionable sales to each other.
¶47 In other words, because section 113 shares section 45’s
language, we look to the federal interpretation for guidance in
resolving the ambiguity in the statute. And “necessary . . . clearly to
reflect the income of any of such corporations,” UTAH CODE § 59-7-
113, means, as it does in its federal analog, that allocation is
“necessary” in circumstances when related companies enter into
transactions that do not resemble what unrelated companies dealing
at arm’s length would agree to do.
IV. The District Court’s Application of the
Arm’s Length Standard
¶48 After interpreting the statute, the district court applied it.
The district court acknowledged the unique nature of the See’s-
Columbia transaction: “The Court believes See’s had an uphill task
. . . establishing an arm[’s] length transaction. After all, it seemed
conveniently owned by the same company that owned a non-income
tax company.” However, after considering the expert testimony and
See’s transfer pricing study, the court concluded that “the transfer
was arm’s length[,] justifying a deduction not barred under [Internal
Revenue Code] section 482 and therefore not barred under Utah
Code Annotated section 59-7-113.”
¶49 The Commission does not challenge the district court’s
factual findings. Accordingly, because we conclude that the district
court correctly ruled that the Legislature intended that section 113 be
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Opinion of the Court
interpreted with reference to its federal counterpart, we affirm the
district court’s decision.
V. Additional Arguments
¶50 The Commission and the MTC make several additional
arguments aimed at convincing us that the district court got it
wrong. The Commission first argues that we “noted the breadth of
the Commission’s authority under section 113” in Continental
Telephone Co. v. State Tax Commission, 539 P.2d 447 (Utah 1975). And
that breadth of authority aligns better with a reading of the statute
that, according to the Commission, authorizes the Commission to
determine, in its sole discretion, when allocation is “necessary . . .
clearly to reflect the income.”
¶51 Specifically, the Commission argues that the following
language from Continental supports its position:
We think the broad wording of [section 113’s
predecessor] indicates a legislative intent to cover all
situations dealing with either direct or indirect
corporate affiliates without regard to whether they file
individual state or consolidated state corporate
franchise tax returns; and that the language of that
section authorizes the Tax Commission to so apportion
income and deductions of corporations within such
controlled groups as to fairly and equitably reflect the
income earned in Utah.
Id. at 451.
¶52 This language does indicate that the Commission should be
granted broad authority to allocate income. However, this authority
is not unlimited. As discussed above, supra ¶¶ 39–47 the better
reading of the statute limits the application of section 113 to
situations where related companies enter transactions on terms that
unrelated companies would not agree to. Once the Commission has
made that determination, it possesses broad authority to allocate
income. But we do not read Continental to support the proposition
that the Legislature intended the Commission to exercise its section
113 discretion untethered to any identifiable standard. 14
_____________________________________________________________
It is worth noting that Continental did not explicitly examine the
14
meaning of “necessary . . . clearly to reflect the income.”
20
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Opinion of the Court
¶53 Next, the Commission argues that “[s]ection 113 and I.R.C.
[section] 482 differ in language and in context of application.” The
Commission first highlights that several linguistic and “minor
grammatical” differences now exist between section 113 and section
482. 15 Additionally, section 482 now allows the Secretary to
distribute, apportion, or allocate credits and allowances in addition
to gross income and deductions, and also contains a provision
referencing intangible property. See 26 U.S.C. § 482. 16 However, the
Commission fails to explain how these differences affect the meaning
of the section 482 in a manner relevant to our analysis of section 113.
¶54 At the time that section 113 was originally adopted as
section 20, the Legislature adopted the language wholesale from the
federal tax code. And that aspect of section 113 has remained
unchanged. That Congress has since added provisions clarifying
section 482’s application that do not substantively alter the language
at issue here does not persuade us that we should afford section 113
a different interpretation.
¶55 The Commission also contends that “[e]ven if the language
of section 113 was identical to I.R.C. [section] 482, they operate
differently because of differences between the Utah and Federal tax
codes.” The Commission points to the federal government’s
“affiliated group” consolidated return requirement and explains that
Utah’s tax scheme operates differently because the Utah Code
combines entities that form a “unitary group.”
¶56 The Commission explains that “[t]he federal government
and some other states have taken a different approach [than Utah]
by taxing the income of insurance companies.” And the Commission
argues that “the current case is one circumstance where combined
reporting does not net out the effect of intercompany transactions,”
and thus “[s]ection 113’s existence suggests that the Legislature
foresaw that there could be circumstances where transactions distort
_____________________________________________________________
15 The Commission explains that “[s]ection 113 discusses
‘corporations,’ ‘whether or not organized or doing business in this
state,’” while section 482 “governs ‘organizations, trades or
businesses’ ‘whether or not incorporated, whether or not organized
in the United States.’”
16 “In the case of any transfer (or license) of intangible property
(within the meaning of section 367(d)(4)), the income with respect to
such transfer or license shall be commensurate with the income
attributable to the intangible.” 26 U.S.C. § 482.
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Opinion of the Court
income or deductions or they cause the evasion of taxes[,] and it
wanted the Commission to be able to reallocate income to clearly
show it.” But this statement does not adequately explain why the
differences between affiliated and unitary groups support the
Commission’s interpretation of section 113. Without more, we are
unpersuaded that section 113 and section 482 differ in their context
and application or that those differences would be material to our
analysis. 17
¶57 Finally, the MTC argues that there are several indications
that the Legislature did not intend for section 113 to be interpreted in
harmony with section 482 and its regulations. The MTC does not rely
on the plain language argument that the Commission makes. Nor
does it directly engage with the history of the language that the
Legislature imported into our code.
¶58 Instead, the MTC first argues that because the arrangement
between See’s and Columbia does not reduce See’s federal taxes in
the same way it reduces its state taxes, section 482 would not apply.
The MTC points out that “the IRS would not need to apply [section]
482 to eliminate related-company deductions in analogous
circumstances where federal taxes would be affected.” The MTC
argues that if section 482 would not apply to See’s federal taxes in
this situation, the Legislature must not have intended that section
113 be construed with reference to its federal analog. And if this was
the only evidence that spoke to the possible meaning of section 113,
it might have some persuasive force. But, as we outlined above, an
abundance of evidence, rooted in the language and history of the
statute, demonstrates that at the time the Legislature inserted this
language into our code, it intended to adopt the “cluster of ideas”
associated with the language it lifted from the federal statute.
¶59 Second, the MTC argues that two policy choices our
Legislature made—to require formulary apportionment and
combined filing—demonstrate “a fundamental choice to reject the
use of transactional accounting as the means for . . . accurately
determining income of a multistate business earned within the state,
_____________________________________________________________
17 Likewise, the Commission’s cursory assertion that the United
States Supreme Court “distinguished the unitary business principle
from the arm’s length approach employed by the federal
government,” supported only by a reference to Container Corp. of
America v. Franchise Tax Board, 463 U.S. 159, 165, 184 (1983), sheds no
light on how we should interpret section 113.
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Opinion of the Court
and determining the income of related companies participating in a
single enterprise.” The MTC suggests that the arm’s length
transaction standard, a method of transactional accounting, is
inconsistent with Utah’s formulary apportionment scheme. The
MTC also asserts that “Utah’s long-standing policy choices favoring
formulary apportionment and combined filing over the sole
alternative—transactional accounting—bear directly on the question
of what it means to ‘clearly reflect income’ under [section 113].” But
the MTC provides no support for its implicit assertion that the
Legislature could not have decided that it wanted a section 113 with
an arm’s length standard to coexist with its other policy choices. This
argument does not persuade.
¶60 Third, the MTC argues that “[s]tate tax agencies may have
authority under state law to remedy potential distortions in income
caused by related company transactions, similar to the arrangement
in this case, by eliminating the effects of those transactions entirely.”
The MTC explains three general approaches: combined filing, add-
back statutes, and taxing the income of the transferee apportioned by
reference to the related transferor. And the MTC emphasizes that
“these approaches are described here not because [the MTC]
contends that they specifically apply to See’s, but because all three
approaches come to the same result—and therefore demonstrate the
accepted standard for clear reflection of income under [section] 113.”
¶61 We understand the MTC to argue that states have employed
various other mechanisms to prevent related companies from
reducing their tax liability by engaging in strategic intercompany
transactions. And the Legislature may decide to implement these
other mechanisms in the future should it wish to prevent companies
like See’s from receiving favorable tax treatment from transactions
like the one at issue here. But we do not see great interpretive value
flowing from the recognition that other states have found ways other
than an arm’s length transaction standard to curb enthusiasm for
these types of related company arrangements.
CONCLUSION
¶62 The district court correctly concluded that section 59-7-113 is
ambiguous. And the district court properly sought interpretive
guidance from section 113’s federal counterpart and its regulations.
The Legislature borrowed the phrase “necessary in order to prevent
evasion of taxes or clearly to reflect the income of any of such
corporations” from federal tax law. The “cluster of ideas” associated
with that language requires an examination of whether a transaction
between related corporations yielded a result similar to one that two
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Opinion of the Court
unrelated companies would reach. Accordingly, we conclude that
the district court did not err in employing the arm’s length
transaction standard to determine that the Commission improperly
allocated See’s income. Affirmed.
24