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STATE OF WISCONSIN

TAX APPEALS COMMISSION


LOUIS DREYFUS PETROLEUM PRODUCTS CORP.,(P)

Petitioner,

vs.

WISCONSIN DEPARTMENT OF REVENUE,

Respondent.

DOCKET NO. 03-I-132(P)

RULING AND ORDER
ON MOTION TO
COMPEL DISCOVERY


DIANE E. NORMAN, COMMISSIONER:

The above-entitled matter came before the Commission for telephone oral arguments on June 1, 2006, upon a written Notice of Motion and Motion to Compel Discovery by the Wisconsin Department of Revenue ("respondent"). Petitioner, Louis Dreyfus Petroleum Products Corp. ("petitioner" or " LDPPC" ), filed a response to the motion. Petitioner appeared by Attorney Frederic J. Brouner of DeWitt, Ross & Stevens, S.C. Respondent appeared by Attorney Mark S. Zimmer.

Having considered the entire record before it, the Commission finds, rules, and orders as follows:

FINDINGS OF FACT

1. Petitioner is a corporation organized and incorporated under the laws of the State of Delaware, with its principal place of business and commercial domicile located at 10 Westport Road, Wilton, Connecticut.

2. For petitioner's fiscal year ending May 31, 1997 (" 1997 tax year" ), petitioner filed a Wisconsin Franchise Tax return on March 16, 1998.

3. On August 17, 1998, respondent issued a Notice of Amount Due which assessed additional franchise tax on petitioner for the 1997 tax year (the " assessment" ).

4. Under date of October 16, 1998, petitioner filed a petition for redetermination with respondent.

5. On March 12, 2003, respondent issued a Notice of Action on petitioner's petition for redetermination denying the relief sought by petitioner.

6. On May 12, 2003, petitioner filed a timely petition for review with the Commission.

7. Respondent served a Request for Production of Documents on petitioner's counsel, dated December 3, 2003. Request No. 7 was for the federal income tax return for the 1997 tax year for the consolidated group (the "consolidated return") of which LDPPC is a member.

8. Petitioner objects to respondent's Request No. 7, and has refused to produce the consolidated return.

9. The assessment relates to income earned by LDPPC in relation to its 50% interest in Pilot Travel Ventures (the "partnership"). LDPPC earned capital gains during the 1997 tax year from the sale of its 50% ownership interest in the partnership to its partner, an unrelated corporation. Also during the 1997 tax year, LDPPC earned interest from a loan of the sale proceeds to its parent corporation, Louis Dreyfus Energy Corporation ("LDEC").

10. At some point during LDPPC's 50% ownership of the partnership, LDEC was under an agreement to provide management services and engage in hedging transactions related to petroleum on behalf of the partnership.

11. An issue on the merits in this matter is whether petitioner is a unitary business with the partnership.

ISSUE INVOLVED

May respondent obtain discovery of petitioner's consolidated federal income tax return for the 1997 tax year?

OPINION

Wisconsin Statutes � 804.01(2)(a) states that a party " may obtain discovery regarding any matter, not privileged, which is relevant to the subject matter involved in the pending action" as long as " the information sought appears reasonably calculated to lead to the discovery of admissible evidence." Anything that is " relevant to the subject matter involved in the pending action" is fair game, even though what is sought to be discovered would not itself be admissible at trial if discovery " appears reasonably calculated to lead to the discovery of admissible evidence." Wis. Stat. � 804.01(2)(a).

Petitioner is objecting to the discovery of the consolidated return on the basis that the document is not relevant to this matter. Petitioner argues that the actual amount of the income that respondent has assessed is not in dispute; rather, the only dispute is whether petitioner was a unitary business with the partnership during the 1997 tax year, which would make petitioner's income apportionable for Wisconsin income tax purposes. It is petitioner's contention that, since the consolidated return would only show numerical amounts of income and deductions, this document would not provide any information relevant to the issue of whether petitioner was a unitary business with the partnership.

The United States Supreme Court has adopted the unitary business principle as the test to determine a state's authority to tax the multistate income of a non-domiciliary corporation under the Due Process and Commerce Clauses of the United States Constitution. If a company is a "unitary business", then a state may apply an apportionment formula to the taxpayer's total income in order to obtain a "rough approximation" of the corporate income that is "reasonably related to the activities conducted within the taxing state." Moorman Manufacturing Co. v. Bair, 437 U.S. 267,273 (1978). The test for the unitary business is composed of three parts, which measure functional integration, centralization of management, and economies of scale, respectively. Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S. 768, 783 (1992).

We conclude that the consolidated return is relevant and, therefore, discoverable in this matter. Because the transactions that gave rise to the assessment involve transactions between related entities, the finances of those related entities are relevant. The income and deductions regarding the partnership and other financial matters between these related companies may provide information about the relationship between the companies and the partnership. This information could be material to show whether petitioner and the partnership were a unitary business, which could be particularly relevant if petitioner's parent corporation was receiving an income for managing the partnership during the 1997 tax year. Since this economic relationship is relevant to an analysis under the unitary business test, the consolidated return is a relevant document for discovery purposes in this matter.

The consolidated return is also discoverable under Wis. Stats. �� 71.30(8) and 71.74(6). Both statutes allow respondent to require production of consolidated statements of a corporation when such statements, in its opinion, are necessary in order to determine the taxable income received by any one of the affiliated or related corporations.[1] Since a showing of the relationship of the related corporations may provide evidence as to whether petitioner is part of a unitary business for Wisconsin income tax purposes, the statutes allow respondent to require production of the consolidated return.

The parties have agreed that if the Commission orders that the consolidated return may be discovered by respondent, the information contained in the document would remain confidential and not public unless respondent shows good cause as to why it should be allowed as evidence in this matter.

While the Commission is granting respondent's motion to compel discovery, respondent's request for costs of bringing the motion is denied. If a party necessitates a motion to compel and the motion is granted, that party shall be required to pay the reasonable costs in bringing the motion unless there is a finding that the opposition was substantially justified. Wis. Stat. � 804.12(1)(c)1. Petitioner's argument that the consolidated return is not relevant and therefore not discoverable is not an unreasonable argument and, so, is substantially justified.

IT IS ORDERED

1. Respondent's motion to compel discovery of petitioner's consolidated federal income tax return for the 1997 tax year is granted.

2. No later than July 14, 2006, petitioner shall provide respondent with a copy of its consolidated federal income tax return for the 1997 tax year.

3. Petitioner's consolidated federal income tax return for the 1997 tax year shall remain confidential and not public unless respondent shows good cause as to why it should be allowed as evidence in this matter.

4. No costs or attorneys fees shall be awarded to respondent for bringing the motion to compel discovery.

Dated at Madison, Wisconsin, this 15th day of June, 2006.

WISCONSIN TAX APPEALS COMMISSION

Diane E. Norman, Commissioner



[1] While the statutes denote a consolidated "statement" and not "return", this makes no practical difference, since the consolidated return is a consolidated statement of the income and expenses of the related companies.