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Alaska Dep't. of Revenue v. OSG Bulk Ships, Inc. (2/20/98), 961 P 2d 399


     Notice:  This opinion is subject to correction before publication in
the Pacific Reporter.  Readers are requested to bring errors to the attention of
the Clerk of the Appellate Courts, 303 K Street, Anchorage, Alaska 99501, phone
(907) 264-0608, fax (907) 264-0878.


             THE SUPREME COURT OF THE STATE OF ALASKA
                                 

STATE OF ALASKA, DEPARTMENT   )
OF REVENUE,                   )    Supreme Court No. S-7498
                              )
             Appellant,       )    Superior Court No.
                              )    3AN-93-7815 CI
     v.                       )
                              )    O P I N I O N
OSG BULK SHIPS, INC.,         )
                              )    [No. 4951 - February 20, 1998]
             Appellee.        )
______________________________)


          Appeal from the Superior Court of the State of
Alaska, Third Judicial District, Kodiak,
                    Donald D. Hopwood, Judge.

          Appearances: Stephen C. Slotnick, Assistant
Attorney General, and Bruce M. Botelho, Attorney General, Juneau,
for Appellant.  Ann M. Bruner, Brian W. Durrell, Bogle & Gates,
Anchorage, and D. Michael Young, Bogle & Gates, Bellevue,
Washington, and Walter Hellerstein, University of Georgia, Atlanta,
Georgia, for Appellee.  Susan A. Burke and Avrum M. Gross, Gross &
Burke, Juneau, for Amicus Curiae Alaska Visitors Association. 
Kenneth Klein, Cadwalader, Wickersham & Taft, Washington, D.C., and
Ronald L. Baird, Anchorage, for Amicus Curiae North West CruiseShip
Association.  

          Before:  Rabinowitz, Matthews, Eastaugh, and
          Fabe, Justices. [Compton, Chief Justice, not
participating.]

          EASTAUGH, Justice.


I.   INTRODUCTION
          This appeal raises questions about the tax payable under
the Alaska Net Income Tax Act, AS 43.20.011-43.20.350 (ANITA), for
tax years 1981 through 1988 on income derived by the taxpayer from
domestic and foreign shipping operations and investments.   The
State of Alaska, Department of Revenue (DOR) assessed additional
income taxes against the taxpayer, OSG Bulk Ships, Inc.  The
superior court reversed DOR's decision and DOR now appeals.  We now
reverse in part and remand for further proceedings.
II.  FACTS AND PROCEEDINGS
     A.   Facts
          OSG Bulk Ships, Inc. (OBS), a New York corporation, is a
wholly-owned first-tier subsidiary of Overseas Shipholding Group,
Inc. (OSG), a Delaware corporation.  OBS and OSG both have their
commercial domiciles in New York.  OSG has more than a fifty
percent ownership interest in over one hundred subsidiaries and
partnerships, most of which are shipping companies.  The shipping
companies collectively own approximately sixty-five ocean-going
vessels used in different types of trade throughout the world.  OBS
owns all of the domestic shipping companies; OSG International,
Inc., which is also a first-tier subsidiary of OSG, owns most of
the foreign shipping companies.
          OSG, including its subsidiaries, is engaged in the ocean
transportation of liquid and dry bulk cargoes in both the worldwide
and U.S. domestic markets.  It owns the largest independent fleet
of unsubsidized U.S.-flag tankers, and is a major participant in
the Alaskan oil trade.  The rest of OSG's fleet is registered under
foreign flags.  OSG also owns several other companies, including
holding companies, financial companies, service companies, and an
insurance company.
          OBS is the taxpayer.  It owned corporations that in turn
owned or chartered tanker vessels entering Alaska waters during
audit years 1981 to 1988. [Fn. 1]  OBS and its domestic shipping
companies reported their Alaska taxes on a unitary basis (as if
they were a single taxpayer engaging in a single business).  OBS
did not include in the unitary group the foreign corporations
related by ownership to OSG.  Nor did OBS include the investment
subsidiaries because OBS claimed they had no connection with Alaska
and were not part of OBS's unitary business.  OBS also claimed
investment tax credits for new vessels.
     B.   Proceedings
          Following audits by DOR's Income and Excise Audit
Division (Audit Division), DOR assessed OBS additional income taxes
for tax years 1979 through 1983, 1985 through 1986, and 1988.
          The Audit Division included approximately ninety foreign
corporations in OBS's unitary group, determining that "OSG and all
its more-than-50-percent-owned subsidiaries, including OBS, were
engaged in a single, unitary business during the period under
audit."  This had the effect of including in the "worldwide unitary
income"of OBS's corporate group the income of the foreign
corporations and all of the subsidiaries in which OSG had more than
fifty percent ownership.  The taxable corporate income attributable
to the group's Alaska business was then calculated by multiplying
the worldwide unitary income of the entire group by an
"apportionment fraction"derived by dividing the value of the
group's Alaska business activities by the value of its worldwide
business activities.  See AS 43.19.010 art. IV,  9.  This
adjustment increased OBS's income taxable in Alaska, and the Audit
Division assessed additional taxes. [Fn. 2]
          OBS protested the assessments.  Following administrative
proceedings, DOR's hearing officer issued a recommended decision
which DOR's Commissioner adopted.  In pertinent part, the decision
held that (1) income earned by OBS's foreign subsidiaries from
operation of foreign flag vessels was not exempted by 26 U.S.C.
sec. 883 and was therefore includable in OBS's apportionable
income; (2) DOR did not exceed its statutory authority by
promulgating 15 AAC 20.110(d), a regulation that reduced OBS's
investment tax credit; and (3) OBS's investment income was properly
treated as business income for Alaska tax purposes.  As of July
1993 OBS's tax assessments totaled $789,495.
          OBS appealed to the superior court, which reversed each
of these three rulings.
          DOR now appeals the superior court's rulings on these
three issues.   
III. DISCUSSION
     A.   Whether Internal Revenue Code Section 883 Exempts OBS's
Foreign Shipping Income from Taxation by Alaska

          The Alaska Net Income Tax Act (ANITA), AS 43.20.011-
43.20.350, taxes a corporation's "entire taxable income . . .
derived from sources within the state."  AS 43.20.011(e).  When OBS
filed its 1981-88 Alaska tax returns, it excluded from its tax base
all income derived from vessels owned by the foreign subsidiaries
in its unitary group.  In doing so, OBS reasoned that AS
43.20.021(a) had incorporated subsection 883(a)(1) [Fn. 3] of the
federal Internal Revenue Code (IRC), codified at 26 U.S.C. sec.
883(a)(1), into ANITA, and that section 883 exempted foreign
shipping income.
          Alaska Statute 43.20.021(a) incorporates sections of the
IRC into the ANITA and the Multistate Tax Compact (MTC), AS
43.19.010-43.19.050, [Fn. 4] unless the IRC provisions are
"excepted to or modified by"other ANITA provisions. [Fn. 5]  The
sections adopted by reference encompass IRC section 883.
          DOR disallowed the exemption, finding that OBS had not
proven that its foreign shipping income was exempt from OBS's
apportionable tax base.  Reversing, the superior court held that AS
43.20.021(a) had incorporated subsection 883(a)(1) into Alaska law,
thus exempting OBS's foreign shipping income. 
          DOR contends on appeal that subsection 883(a)(1) is
"excepted to or modified by"the ANITA, given differences in the
methods employed by the State of Alaska and by the federal
government for determining taxable income. [Fn. 6]  OBS argues that
Alaska's income tax scheme is "entirely consistent"with the
section 883 exemption. [Fn. 7]
          This is not the first time we have considered whether
Internal Revenue Code provisions, ostensibly adopted by reference
by AS 43.20.021(a), were "excepted to or modified by"other ANITA
provisions.  In Gulf Oil Corp. v. State, Department of Revenue, 755
P.2d 372, 380 (Alaska 1988), we held that a portion of the IRC
dealing with the foreign tax credit was "excepted to or modified
by"AS 43.20, which allowed neither a deduction nor a credit for
foreign income taxes.  In so holding, we noted that "[t]hat is not
to say that Alaska law incorporates no Code provisions and no
federal regulations having to do with the foreign tax credit. 
Future cases may reveal that it is desirable to conform our law to
certain aspects of those federal provisions."  Id.  The source of
the exception in Gulf Oil was the absence in AS 43.20 of any
provision for a deduction similar to that provided by the IRC.
          In this case, we must decide whether the tax scheme
employed by the ANITA implicitly excepts to or modifies application
of section 883. We first compare the different methodologies
applied by the United States and the State of Alaska to determine
taxable income.  
          When a state seeks to tax the income of a multinational
business, it must determine the income properly allocable to in-
state activities.  Id. at 374.  At all relevant times, Alaska has
employed the worldwide formula apportionment method to calculate a
multinational or interstate corporation's income earned in Alaska. 
AS 43.20.065; AS 43.19.010, art. IV,  9.  Under that method, in-
state income is determined by multiplying a corporation's worldwide
income by an "apportionment fraction."  AS 43.19.010, art. IV,  9.
[Fn. 8]  A taxpayer's apportionment fraction is the numerical
average of three factors -- its "property factor,"its "payroll
factor,"and its "sales factor"-- which compare its in-state
business activities with its worldwide business activities. [Fn. 9]
          The United States does not utilize the "formula
apportionment"method when it calculates the federal taxable income
of multinational corporations.  Instead, it uses "sourcing"
provisions to allocate income to the United States or to other
sources, depending upon where the income is earned.  26 U.S.C.
sec.sec. 861-65; see also 26 C.F.R. sec. 1.861-1 (1996).  Income
that cannot reasonably be "sourced"to the United States is
deducted from the taxpayer's gross income and is not included when
a taxpayer's U.S. income is calculated.  Id.
          There is consequently a fundamental difference in the way
these governments calculate the taxable income of a multinational
corporation.  Alaska accomplishes its calculation by applying to
all income an apportionment fraction that separates the local
income from that earned elsewhere.  The key to proper separation
under this method is the apportionment fraction; it is in the
calculation and application of this fraction that the separation is
made.  In comparison, the United States makes this separation when
it first allocates income to sources inside and outside the United
States. 
          OBS and DOR agree that Alaska's adoption of the worldwide
apportionment method in AS 43.19 establishes an exception to IRC
sections 861 through 865, which relate to the "sourcing"of income
for tax purposes.  They disagree, however, about whether IRC
section 883, which is contained in the same IRC subchapter, is a
"sourcing"provision.  OBS claims and the superior court held that
it is not, because it grants an exemption, and consequently there
is nothing in AS 43.20 that excepts to adopting IRC section 883
into Alaska's corporate tax scheme.
          The ANITA does not expressly except to or modify the
provisions of IRC section 883.  Nonetheless, the scheme of
allocation and apportionment provided in the MTC, AS 43.19, is
fundamental to the ANITA in the context of taxation of taxpayers
with foreign income.  See AS 43.20.065. [Fn. 10]  Several
circumstances convince us that, in the context of OBS's claim that
its foreign shipping income should be exempted from taxation in
Alaska, subsection 883(a)(1) is impliedly excepted to by the ANITA. 

          We first note that the MTC provides a comprehensive
methodology for the allocation and apportionment required by the
ANITA, AS 43.20.065.  As seen above, the key to that methodology is
the apportionment fraction.  In our view, it is inconsistent with
the MTC, and therefore the ANITA, to exempt an entire class of
foreign-earned income from the taxpayer's worldwide income for
purposes of attempting to distinguish between locally taxable and
nontaxable income.  Under the MTC, this separation is accomplished
through the application of the apportionment fraction, not the
calculation of worldwide income.  The legislative history of
section 883 demonstrates that it was enacted to eliminate the
"'double taxation'"of shipping income.  M/V Nonsuco, Inc. v.
Commissioner of Internal Revenue, 234 F.2d 583, 587 (4th Cir. 1956)
(citing S. Rep. No. 275, 67th Cong., 1st Sess. (1921), 1939-1 (Part
2) C.B. 181, 191).  The danger of multiple taxation in that context
arises because multinational shipping activities subject the
taxpayer to taxation by more than one nation.  Avoidance of
multiple taxation is the same purpose served by the MTC through the
apportionment fraction.
          DOR contends that allowing the section 883 exemption
would have the effect of doubly protecting foreign shipping income.
It reasons that because the denominator of a taxpayer's
apportionment fraction is based on the value of all property,
sales, and payroll, wherever and however derived, the inclusion of
the values relating to foreign-flag vessels when calculating those
factors under AS 43.19.010 art. IV,  9, 10, 13 & 15, reduces the
apportionment factor.  If section 883 also applied, thus reducing
the taxpayer's worldwide income, it would cause a further reduction
when the already-reduced apportionment fraction is multiplied by
the newly reduced worldwide income.  DOR concludes that this result
would understate the taxpayer's Alaska taxable income.  We agree
that this would be the effect of granting the section 883
exemption.
          It is also significant that the ANITA contains a statute
that appears to deal specifically and comprehensively with the
problem of multiple taxation of foreign or multistate water
transportation carriers.  See AS 43.20.071.  That statute provides
for apportionment of all business income of water transportation
carriers in accordance with the MTC's apportionment formula
methodology by modifying the property, payroll, and sales factors
from which the apportionment fraction is calculated, by applying a
"days-in-port"fraction. [Fn. 11]   This method further reduces the
three statutory MTC factors, and thus the MTC's apportionment
fraction. The result is a reduction in taxable income.   
          OBS argues that AS 43.20.071 is compatible with statutory
exemptions like that provided by section 883, because section .071 
simply applies the apportionment method for water transportation
carriers after their apportionable tax base is determined by
eliminating exempt income.  We reach a contrary conclusion.  We
think the reference in AS 43.20.071(a) to "all business income"of
water transportation carriers is more consonant with finding the
section 883 exemption inapplicable.  Reading "all business income"
at face value suggests that it encompasses all income of a business
origin, without reduction for any class of income of foreign
origin.  Further, it appears that in the federal scheme, section
883 uses separate accounting methodology to avoid the problem of
multiple international taxation of transportation carriers by
assigning income to a source through reciprocal exemptions.  The
days-in-port ratio adopted by AS 43.20.071 avoids multiple taxation
of transportation carriers by formula apportionment.  As DOR argues
in its reply brief, "Alaska has no need to incorporate a reciprocal
exemption to avoid possible unfair double taxation of foreign or
domestic vessels."  More fundamentally, there is no reason to think
that the legislature which adopted AS 43.20.071 to provide for
sophisticated adjustments to the MTC apportionment fraction,
specifically to prevent multiple taxation of water transportation
carriers, contemplated that any other unspecified adjustments would
be needed to avoid misallocation of this class of business income.
[Fn. 12] 
          OBS argues that the exemption provided by section 883 is
not inconsistent with AS 43.20.011, which taxes "the entire taxable
income of every corporation derived from sources within the State."
It also argues that section 883 income can be earned either within
or outside Alaska waters, and that AS 43.20.011, which
geographically limits taxation to income derived from "sources
within the State,"operates alongside and independently of section
883.  It similarly interprets AS 43.20.065 to provide for
apportionment of income after reductions for applicable exemptions. 
OBS also argues that section 883 is not inherently incompatible
with the general apportionment provisions of the MTC, and notes
that DOR does not object to applying other exemptions, such as IRC
section 103, which exempts interest. 
          DOR responds that provisions such as section 103 do not
have the effect of assigning income to a foreign or domestic
source, unlike section 883.  We agree with that distinction. 
          We conclude that the arguments for finding that AS 43.20
impliedly excepts to section 883 are stronger than those to the
contrary. [Fn. 13]  If we were to accept OBS's position, it would
inevitably result in understating OBS's Alaska taxable income in a
way not intended by the Alaska legislature.  
     B.   Whether DOR Exceeded Its Statutory Authority by Adopting
15 AAC 20.110(d)
     
          DOR next argues that the superior court erred in holding
that DOR exceeded its authority by promulgating a regulation
limiting the statutory investment tax credit. [Fn. 14]
          The legislature enacted the investment tax credit as part
of the ANITA by adopting 26 U.S.C. sec. 38 by reference.  AS
42.20.021(a).  Section 38 provided an investment tax credit for
taxpayers who invested in tangible personal property used in a
trade or business. [Fn. 15]  
          The legislature adopted several statutory limitations on
the credit.  It limited the credit for corporations to eighteen
percent of the federal credit which was "attributable to Alaska." 
AS 43.20.021(d). [Fn. 16]  It also limited the credit to the amount
of federal credit on "the first $20,000,000 of qualified investment
. . . put into use in the state for each taxable year."  AS
43.20.036(b). [Fn. 17]  
          DOR promulgated an investment tax credit regulation, 15
AAC 20.110, and in doing so cited as authority AS 43.05.050, AS
43.20.021, and AS 43.20.036.  Subsection (d) of that regulation
treated transportation equipment "first used"in Alaska as "new
property."[Fn. 18]  It also prorated qualified expenditures by
comparing the number of days the property was used in Alaska and
the number of days it was used elsewhere.
          OBS claimed investment tax credits, calculated as
eighteen percent of the first $20 million of qualified investments
put into use for each taxable year, and prorated under 15 AAC
20.110(d) by comparing days of in-state and out-of-state use.  The
auditor disallowed any credit for vessels that had not visited
Alaskan ports on their initial voyages, per 15 AAC 20.110(d).  On
appeal by OBS, the superior court held that DOR had exceeded its
authority by promulgating a regulation containing first use and
pro rata apportionment limitations in addition to the limitations
imposed by AS 43.20.021(d) and AS 43.20.036(b).
          When reviewing the validity of an agency's regulations,
we initially determine whether the agency had the authority to
adopt such regulations.  This determination is a question of law to
which we apply our independent judgment.  See Warner v. State, Real
Estate Comm'n, 819 P.2d 28, 31 (Alaska 1991).  
          To be within the agency's grant of rulemaking authority,
a regulation must be "consistent with and reasonably necessary to
carry out the purposes of the statutory provisions conferring rule-
making authority on the agency."  State, Dep't of Revenue v. Cosio,
858 P.2d 621, 624 (Alaska 1993) (citations omitted).  This test
ensures that in promulgating the regulations the agency did not
exceed the power delegated to it by the legislature.  Id.  We next
determine "whether the regulation is reasonable and not arbitrary." 
Id.  
          "We accord an administrative regulation a presumption of
validity; the party challenging the regulation bears the burden of
demonstrating its invalidity."  Anchorage Sch. Dist. v. Hale, 857
P.2d 1186, 1188 (Alaska 1993) (citations omitted).  Further, we
will not "substitute our judgment for that of the agency with
respect to the efficacy of a regulation nor review the 'wisdom' of
a particular regulation."  Id. (citation omitted).  However, we
will apply the substitution of judgment standard of review when
reviewing the validity of an administrative regulation because this
is a question of statutory interpretation.  Id. at 1188 n.3. 
          Whether 15 AAC 20.110(d) is valid depends here on whether
it is consistent with the tax credit statutes and reasonably
necessary for their enforcement.  See AS 43.05.080; AS 44.62.030.
[Fn. 19]  See also Cosio, 858 P.2d at 624.
          Citing the plain language of AS 43.20.036(b), its
legislative history, and canons of statutory construction, DOR
contends that 15 AAC 20.110(d) is consistent and necessary because
the regulation simply clarifies when a credit is allowed for
transportation property not used exclusively in the state. 
          OBS argues that 15 AAC 20.110(d) is unnecessary and
inconsistent with the statutes providing for the credit.  It
asserts that the regulation's pro rata apportionment requirement
results in a double reduction of the credit, because the statutes
already limit the credit to property used in Alaska.  Implicit in
OBS's argument is the assertion that a taxpayer is entitled to the
full credit regardless of the amount of time the property is used
in Alaska.
               a.   Legislative history
          Before it was amended in 1981, AS 43.20.036(b) provided
a credit for any "section 38"property, and did not limit the
credit to property put into use in Alaska.  The 1981 amendments
were introduced in Senate Bill 524, and added the requirement that
the equipment or property be put into use "in the state."  Senate
Bill (S.B.) 524, 12th Leg., 1st Sess. (1981).  The House Finance
Committee also adopted a letter of intent which stated that "HCSSB
524(Fin) provides an increase in the investment tax credit allowed
for in-state investments for corporations doing business in
Alaska."  1981 House Journal 2009 (June 8, 1981).  Thus, the
legislature intended to encourage commercial investments in Alaska
in order to benefit Alaska's economy.   
               b.   Statutory construction
          The tax credit statutes have two features salient here.
[Fn. 20]  Alaska Statute 43.20.021(d), a subsection of the statute
that adopted the IRC section 38 investment tax credit by reference,
limits the state credit to a percentage of the federal credit
"which is attributable to Alaska."  Alaska Statute 43.20.036(b)
limits the credit to a qualified investment "put into use in the
state for each taxable year."  
          The latter statute can reasonably be read to require that
the equipment first be used in Alaska as a qualification for the
credit.  Both statutes can reasonably be read to require a
determination of the extent to which the credit "is attributable to
Alaska"or the investment is "put into use"in Alaska.  Such a
determination necessarily involves distinguishing use in Alaska
from use elsewhere.  Absent such a determination, a taxpayer would
be entitled to a full tax credit in Alaska even though the property
received little use in Alaska.
          From the legislative history and the statutory language
"put into use in the state,"it is clear that the legislature
intended the credit to apply to property put into use within the
state during the taxable year.  The amendment was adopted in order
to benefit Alaska's economy by encouraging investment in the state. 
Thus, DOR's interpretation of the language "put into use in the
state"as "first use"clarifies an ambiguity left by the statutory
language -- the meaning of "put into use in the state"-- in a
manner consistent with legislative intent.  The "first use"
requirement guarantees that the equipment or property is not used
up outside the state, and is not brought just momentarily to the
state at the end of the taxable year. [Fn. 21]  DOR has interpreted
the first use requirement for transportation equipment to mean an
initial voyage in which Alaska was a port of call.
          DOR's adoption of the pro rata apportionment formula for
transportation equipment and property is also consistent with the
statutory purpose.  Without such a requirement, owners of
interstate transportation equipment could receive a full tax credit
from every state in which their property was used in a given year. 
The limited tax credit based upon days in port also fairly
determines the "contribution"the taxpayer is making to Alaska
without giving credit for investment outside of the state.  
          We find that 15 AAC 20.110(d) is consistent with and
reasonably necessary to implement the provisions of AS 43.20.021(d)
and AS 43.20.036(b). [Fn. 22]  Our conclusion is also consistent
with the following canon of construction:  Exemptions are narrowly
construed against the taxpayer.  State, Dep't of Revenue v. Alaska
Pulp Am., Inc., 674 P.2d 268, 276 (Alaska 1983).  In effect, DOR's
regulation interpreted the tax credit statutes.  DOR did not exceed
its authority in doing so.  We conclude that the superior court
erred in holding to the contrary.
     C.   Whether OBS's Apportionable Income Should Include the
Income of the Related Investment Companies
     
          The DOR hearing officer concluded that OBS had not proven
that investment income (consisting of interest, dividends, and
capital gains) earned by corporations within OBS's unitary group
was not operational business income.  The hearing officer therefore
included that income in OBS's apportionable tax base.  The superior
court reversed, holding that the investment income was not
"business income"because it was not used as operating capital in
OBS's shipping business and because it was earned through
investment activities unrelated to Alaska.  DOR argues on appeal
that the investment income should be included in OBS's
apportionable tax base. [Fn. 23] 
          Two tests govern our resolution of this issue: (1) the
statutory test set out in the Alaska tax statutes to determine if
the investment income was "business"income, and (2) the
constitutional test adopted by the United States Supreme Court in
Allied-Signal, Inc. v. Director, Division of Taxation, 504 U.S.
768, 787-88 (1992), to determine if the income was used for an
investment or an operational purpose. [Fn. 24]
          OBS states that the only investment income at issue is
that of its related investment companies which the auditor included
in OBS's unitary group. [Fn. 25]  DOR contends that at the hearing
before DOR, OBS argued that none of its investment income was
apportionable.  Neither the DOR hearing officer nor OBS segregated
the investment income of the shipping companies from the investment
income of the investment companies within OBS's unitary group.
          1.   The statutory standard:  business vs. nonbusiness
income

          Taxing a corporation's "entire taxable income . . .
derived from sources within the state,"see AS 43.20.011(e), in
part requires allocation and apportionment of income to in-state
and out-of-state sources in accordance with AS 43.19, the
Multistate Tax Compact (MTC).  See AS 43.20.065 ("A taxpayer who
has income from business activity that is taxable both inside and
outside the state or income from other sources both inside and
outside the state shall allocate and apportion net income as
provided in AS 43.19 (Multistate Tax Compact), or as provided by
this chapter.").  The MTC classifies corporate income from
intangible property into two categories, "business income"and
"nonbusiness income."  AS 43.19.010, art. IV,  1(a), (e).  The MTC
states that "business income"includes: 
          [I]ncome 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.

AS 43.19.010, art. IV,  1(a).  A taxpayer's taxable Alaska income
is its business income as apportioned according to the three-factor
formula apportionment method.  AS 43.19.010, art. IV,  9. [Fn. 26] 

          "Nonbusiness income"encompasses "all income other than
business income."  AS 43.19.010, art. IV,  1(e).  Under the MTC,
nonbusiness income from capital gains from the sale of intangible
property, interest, and dividends must be allocated to the
taxpayer's commercial domicile; thus, if the taxpayer's commercial
domicile is outside Alaska, the taxpayer's apportionable Alaska tax
base does not include income generated from these sources.  AS
43.19.010, art. IV,  4, 6(c), 7.  The taxpayer's commercial
domicile is "the principal place from which the trade or business
of the taxpayer is directed or managed."  AS 43.19.010, art. IV, 
1(b).  If the income from dividends, interest, or capital gains
from intangibles is "business income"as it is defined above, it is
properly included in the taxpayer's apportionable tax base.  Thus,
whether ANITA taxes a corporation's out-of-state income depends in
part on whether it is "business income"under the MTC. 
          We must determine whether the hearing officer correctly
applied Alaska's statutory tax standards to OBS's investment
income.  The Oregon Supreme Court in Sperry & Hutchinson Co. v.
Department of Revenue, 527 P.2d 729 (Or. 1974), was the first state
supreme court to determine whether a corporation's interest income
from investments constituted business income under UDITPA.  See 1
Jerome R. Hellerstein & Walter Hellerstein, State Taxation sec.
9.10[1][a], at 9-48 (2d ed. 1993).   The court there concluded that
earnings from short-term securities held to satisfy the
corporation's needs for liquid capital in its Oregon operations
constituted business income, but that earnings from short-term
securities held pending acquisition of other companies or favorable
developments in the long-term money market, and long-term
securities held for investment purposes, were non-business income. 
Id. at 730-31.  See also Lone Star Steel Co. v. Dolan, 668 P.2d 916
(Colo. 1983) (following Sperry & Hutchinson and holding that under
UDITPA, interest income on short-term loans made by Lone Star to
its parent company from surplus funds not immediately needed for
Lone Star's operations was business income); Cincinnati New Orleans
and Tex. Pac. Ry. v. Kentucky Dep't of Revenue, 684 S.W.2d 303 (Ky.
App. 1984) (holding interest income earned by railroad company from
short-term securities purchased with surplus cash from its railroad
operations was business income).  
          In the instant case, although the disputed income was
generated from investments and New York is the domicile of OBS and
the related investment corporations, the hearing officer found the
disputed income was business income on the theory that the
acquisition, management, and disposition of this intangible
property (dividends, interest, and capital gains) constituted
integral parts of the taxpayer's regular trade or business
operations.  The payors of this income were not members of OBS's
unitary group, but were generally major, publicly-owned business
entities, including AT&T, Bankamerica Corporation, Northwest
Bancorp, Sears, Roebuck & Co., and Citicorp.  The hearing officer
reached her conclusion by examining OSG's annual reports to its
stockholders; the affidavits of Alan Carus, [Fn. 27] OSG's
controller; and the minutes from OSG's board meetings.      
          According to Carus, earnings totaling over $200 million
were the primary source of investment funds OSG accumulated before
it commenced its Alaska shipping activities.  Proceeds, totaling
about $17 million, from public stock offerings in 1970 and 1972
were another source.  Carus also affied that the investments are
not operationally related to OBS's Alaska shipping business, and
that "shipping income of the shipping subsidiaries, rather than
investment income, was generally used to cover the costs of
operation of the shipping operations."  Carus stated that OBS
intended to make these investments for investment purposes only,
and that the income generated did not serve an operational
function.  Carus conceded that because "dollars are fungible,"it
was impossible to say that no investment income strayed into use
for OBS's operating costs; however, he also stated that it was
highly unlikely that any significant amount of the investment
income was invested in the companies' vessels that called in
Alaska.  He also affied that the "overwhelming majority"of the
investment income was reinvested, and that the cost basis of the
investment assets grew from $97 million at the beginning of the
audit periods to $261 million at the end of the audit periods. 
"The shipping subsidiaries that called in Alaska were self-
sufficient, i.e., they generated sufficient revenues from their own
operations to cover their expenses."  He also affied that "[n]one
of the stocks, bonds, or other investment assets was used as
collateral for any debt of the shipping subsidiaries." 
          In determining that OBS's investment income was "business
income"under AS 43.19.010, art. IV,  1(a), the hearing officer
found that "concrete evidence"did not support Carus's statements
that the investments were made for an investment function and that
the shipping companies covered their operating costs with operating
revenue (rather than investment income). [Fn. 28]  The hearing
officer focused upon Carus's fungibility admission.  Based in part
upon that admission, the hearing officer concluded that OBS had not
carried its burden of showing that its investment income
constituted nonbusiness income. 
          The Audit Division also relied on OSG's 1996 annual
shareholders report.  That report stated that OSG's "strong and
highly liquid financial condition provides a sound foundation for
future progress . . . . [OSG's] significant cash flow has enabled
[it] to reduce its long term debt to equity ratio to its lowest
level . . . and to continue to upgrade its fleet and to pursue
opportunities as they arise."  From this, the hearing officer
concluded that "[i]t is clear that building its financial strength
was a key component of [OBS's] overall strategy to be in a position
to pursue opportunities for expansion when they arose."  The
hearing officer therefore concluded that the "acquisition,
management and disposition of [OBS's] investments was an integral
part of [OBS's] business"since the investment decisions were
"obviously aimed at building its financial strength overall."  
          In our view it is unwise to construe the two MTC
categories, "business income"and "nonbusiness income,"without
reference to the constitutional standard which has been established
by decisions of the United States Supreme Court.  The compatibility
of these standards has been suggested by the Court in Allied-
Signal.  To avoid confusion and needless separate discussion of the
MTC and constitutional standards, we will consider that one
requirement for finding that income is "business income"under the
MTC is that it is income which is taxable under the constitutional
standard.  We now discuss that standard.  
          2.   The constitutional standard: investment income
versus operational income
          
          "The principle that a State may not tax value earned
outside its borders rests on the fundamental requirement of both
the Due Process and Commerce Clauses"of the U.S. Constitution that
"'some definite link, some minimum connection'"must exist
"'between a state and the person, property or transaction it seeks
to tax.'"  Allied-Signal, 504 U.S. at 777 (quoting Miller Bros. Co.
v. Maryland, 347 U.S. 340, 344-45 (1954)).  The Commerce Clause
imposes this limitation because corporations would be subjected to
severe multiple taxation which would negatively affect the national
economy if each state were permitted to tax values earned outside
its borders.  Allied-Signal, 504 U.S. at 777-78.  
          The "minimum connection"requirement of the Due Process
Clause requires that when a state seeks to tax income earned by a
multistate or multinational corporation from a particular activity,
there must be a connection between the state and the activity,
rather than a connection only to the actor whom the state seeks to
tax.  Id. at 778.  The Supreme Court has held that when a
nondomiciliary corporation doing some business within the state
receives dividends from a subsidiary having no other connection
with the state, the state may not constitutionally tax the dividend
income unless the recipient taxpayer corporation and its underlying
subsidiary payor were engaged in a unitary business.  ASARCO Inc.
v. Idaho State Tax Comm'n, 458 U.S. 307 (1982).   
          In Allied-Signal the Supreme Court reaffirmed the unitary
business principle as the linchpin for determining whether a state
may constitutionally tax the dividend income of a nondomiciliary
corporation. [Fn. 29]    The Court went on to hold, however, that
a unitary relationship between the payor of the intangible income
(there, a corporate dividend) and the payee is not invariably a
necessary prerequisite for apportionment of income to a
nondomiciliary state.  504 U.S. at 787.  The  test is whether the
"capital transaction serve[s] an operational rather than an
investment function."  Id.  As an example of an "operational"
function, the Supreme Court cited short-term investments that
provide working capital for a corporation, such as "the interest
earned on short-term deposits in a bank located in another state if
that income forms part of the working capital of the corporation's
unitary business."  Id. at 787.
          The hallmarks of an acquisition that is part
of the taxpayer's unitary business continue to be functional
integration, centralization of management, and economies of scale. 
Container Corp. clarified that these essentials could respectively
be shown by: transactions not undertaken at arm's length; a
management role by the parent that is grounded in its own
operational expertise and operational strategy; and the fact that
the corporations are engaged in the same line of business.

Allied-Signal, 504 U.S. at 789 (citing Container Corp. of Am. v.
Franchise Tax Bd., 463 U.S. 159, 178, 180 (1983)) (citations
omitted).  
          The taxpayer must prove by "clear and cogent evidence"
that the state is seeking to tax extraterritorial values.  See
Container Corp. of Am., 463 U.S. at 175.  In Container Corp. the
Supreme Court noted that "'[t]his burden is never met merely by
showing a fair difference of opinion which as an original matter
might be decided differently. . . . [W]e will [not] re-examine, as
a court of first instance, findings of fact supported by
substantial evidence.'"  Id. at 176 (quoting Norton Co. v.
Department of Revenue, 340 U.S. 534, 537-38 (1951)).  See
also Allied-Signal, 504 U.S. at 794 (O'Connor, J., dissenting)
(citing Container Corp. and asserting that the taxpayer had not met
its "heavy burden"of proving by clear and cogent evidence that its
capital gains were not operationally related to its in-state
business). 
          The Court held in Allied-Signal that the "mere fact that
an intangible asset was acquired pursuant to a long-term corporate
strategy of acquisitions and dispositions does not convert an
otherwise passive investment into an integral operational one." 
Id. at 788. 
          Applying Allied-Signal to the OBS evidence in context of
the statutory business/nonbusiness income distinction, the hearing
officer concluded that the income generated by OBS's related
investment companies was operational and properly includable in
OBS's apportionable tax base. [Fn. 30]
          The DOR hearing officer also rejected assertions found in
the supplemental Carus affidavit that the purpose of making the
investments was for an investment function and not an operational
function.  The hearing officer stated that OBS's claims were not
"supported by any concrete evidence."  The hearing officer found
that given the fungibility of dollars, "investment"monies may have
been used to fund the shipping companies within the unitary group,
and that OBS had failed to meet its burden of showing that its
income from investments clearly constitutes investment income. 
          OBS contends that the facts relied upon by the hearing
officer do not satisfy Allied-Signal's "operational"income test. 
It argues that evidence of commingling some investment income with
income used for shipping operations is insufficient to show that
the investment income is "operational."  
          Although Allied-Signal provides examples of the types of
income that can properly be characterized as "operational income,"
the Court there noted that determining whether income serves an
operational or investment function is fact intensive.  Id. at 785. 
In the case at bar, any commingling by OBS of investment income of
its nondomiciliary investment companies with income used for the
operational expenses of the shipping companies with vessels that
called in Alaska appears to have been de minimis.  See generally, 
F.W. Woolworth Co. v. Taxation and Revenue Dep't, 458 U.S. 354,
363-64 & n.11 (1982) ("All dividend income -- irrespective of
whether it is generated by a 'discrete business enterprise' --
would become part of a unitary business if the test were whether
the corporation commingled dividends from other corporations
. . . ."(citation omitted) (emphasis omitted)). 
          The Court held in Allied-Signal that out-of-state
investment income may be taxed only when the investment amounts to
the acquisition of capital for the corporation's unitary business,
or when the investment is so short-term that it amounts to a bank
account for the unitary business.  504 U.S. at 789-90.  The
hallmarks of an investment that becomes part of the unitary
business are "functional integration, centralization of management,
and economies of scale."  Id. at 789.  The Court there concluded
that the petitioner corporation's investment in the stock of a
second corporation did not qualify as operational because the two
corporations' activities were unrelated, and the first corporation
did not even acquire a controlling stake in the second corporation. 
Id. at 788.  The Court was careful to reiterate that how the
investment income is used is irrelevant; it noted that even if
those proceeds are used to acquire capital that becomes part of the
unitary business, out-of-state investment income cannot be taxed
unless the investment itself "was run as part of [the] unitary
business."  Id. at 789.  
          Income from investments that are not part of the unitary
business may still be taxed if the income accrues from "short term
deposits in a bank"and "that income forms part of the working
capital of the corporation's unitary business."  Id. at 787.  The
Court found in Allied-Signal that stock held "for over two years"
could not amount to "a short term investment of working capital
analogous to a bank account."  Id. at 790.  
          The hearing officer concluded that OBS's "investment
decisions were obviously aimed at building its financial strength
overall."In our view, the hearing officer's definition of
"operational income"would swallow the distinction between
operational and investment income.  See Allied-Signal, 504 U.S. at
784-85 (rejecting New Jersey's argument that since "multistate
corporations . . . regard all of their holdings as pools of assets,
used for maximum long-term profitability, . . . any distinction
between operational and investment assets is artificial"). 
Further, Carus explicitly affied that none of the investment assets
was used as collateral for any debt of the shipping subsidiaries.
Because the hearing officer applied a standard that the Supreme
Court rejected in Allied-Signal, and because we cannot say as a
matter of law that OBS met its burden of proving that the
investment income was not operational, we reverse the determination
made by the DOR hearing officer.  We remand so that OBS's
investment income may be segregated as between investment or
operational functions.  On remand, the corporation's out-of-state
investment income may be apportioned for state taxation only if
either (1) the investment itself constitutes part of the
corporation's unitary business (where unitariness is indicated by
functional integration, centralization of management, and economies
of scale), or (2) the investment is short term and the income is
used to fund the unitary business, such that the investment is
analogous to a bank account for the unitary business. 
IV.  CONCLUSION
          For these reasons, we REVERSE the superior court judgment
to the extent it is based on that court's holdings that the section
883 exemption applies to OBS here and that DOR exceeded its
statutory authority when it promulgated 15 AAC 20.110(d).  We
REVERSE the superior court's holding that OBS's investment income
was nonbusiness income, and we REVERSE and REMAND for a
redetermination by the DOR hearing officer whether OBS's income is
operational or investment income pursuant to the constitutional
test announced in Allied-Signal.


                            FOOTNOTES


Footnote 1:

     These corporations were: Cambridge Tankers, Inc.; Juneau
Tanker Corporation; San Diego Tankers, Inc.; San Jose Tankers,
Inc.; Santa Barbara Tankers, Inc.; Santa Monica Tankers, Inc.; and
Lake Michigan Bulk Carriers, Inc.  DOR treated these corporations
as one taxpayer for audit purposes, and referred to them as "OSG
Bulk Ships, Inc."because that is how the taxpayer referred to
itself in its consolidated Alaska Corporation Net Income Tax
Returns.  We follow the same convention here.


Footnote 2:

     OBS states in its brief that while it does not agree with
DOR's inclusion of approximately ninety foreign corporations in
OBS's unitary group, it does not contest this issue on appeal.


Footnote 3:

     The version of section 883 in effect after amendment in 1986
provided:
     
               (a)  Income of foreign corporations from
ships and aircraft. -- The following items shall not be included in
gross income of a foreign corporation, and shall be exempt from
taxation under this subtitle: [para.](1) Ships operated by certain
foreign corporations. -- Gross income derived by a corporation
organized in a foreign country from the operation of a ship or
ships if such foreign country grants an equivalent exemption to
citizens of the United States and to corporations organized in the
United States.  

26 U.S.C. sec. 883(a)(1) (1988).

          Prior to its amendment in 1986, subsection 883(a)(1)
stated:
     
               (a)  Income of foreign corporations from
ships and aircraft. -- The following items shall not be included in
gross income of a foreign corporation, and shall be exempt from
taxation under this subtitle: [para.] (1) Ships under foreign flag.
-- Earnings derived from the operation of a ship or ships
documented under the laws of a foreign country which grants an
equivalent exemption to citizens of the United States and to
corporations organized in the United States.  

26 U.S.C. sec. 883(a)(1), amended by Pub. L. 99-514, sec.
1212(c)(3)-(5), 100 Stat. 2538 (Oct. 22, 1986).

          The amendments to subsection 883(a)(1), effective for tax
years after December 31, 1986, simply change the focus for the
exemption from the country of the ship's documentation to the
country of the corporation's organization.  This change does not
affect the section 883 analysis for OBS because all of OSG's
foreign shipping subsidiaries that the auditor included as part of
the unitary group both are organized under the laws of a foreign
country that grants an equivalent exemption and own or operate
ships documented under a country that grants an equivalent
exemption.


Footnote 4:

     The MTC is a restatement of the Uniform Division of Income for
Tax Purposes Act (UDITPA), which was adopted in Alaska in 1959, but
was then repealed in 1975.  See State, Dep't of Revenue v. Amoco
Prod. Co., 676 P.2d 595, 598 & n.3 (Alaska 1984).


Footnote 5:

     AS 43.20.021(a) provides that "[s]ections 26 U.S.C. 1-1399 and
6001-7872 (Internal Revenue Code), as amended, are adopted by
reference as a part of this chapter.  These portions of the
Internal Revenue Code have full force and effect under this chapter
unless excepted to or modified by other provisions of this
chapter." 


Footnote 6:

     We independently review the merits of an administrative
decision.  Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233
(Alaska 1992).  No deference is given to the superior court's
decision when that court acts as an intermediate court of appeal.
Id.

          The interpretation of a tax statute is a question of law
for which we have articulated two standards of review.  We have
distinguished between the rational basis test for questions of law
involving agency expertise, and the substitution of judgment
standard for questions of law that do not involve agency expertise. 
Earth Resources Co. v. State, Dep't of Revenue, 665 P.2d 960, 964-
65 (Alaska 1983). 
 
          In this case, we must determine whether a particular IRC
provision is excepted to or modified by the ANITA.  This is a
matter of pure statutory construction which is not within the
particular expertise of the agency and which requires us to
exercise our independent judgment.  We have previously held that
where the issues to be resolved "'turn on statutory interpretation,
the knowledge and expertise of the agency is not conclusive of the
intent of the legislature in passing a statute.'"  Tesoro Alaska
Petroleum Co. v. Kenai Pipe Line Co., 746 P.2d 896, 904 (Alaska
1987) (citation omitted).  We therefore substitute our judgment for
that of DOR.


Footnote 7:

     Two amici curiae, the Alaska Visitors Association (AVA) and
North West Cruiseship Association (NWCA), filed briefs supporting
OBS's position on this issue.      


Footnote 8:

     A corporation's "worldwide"income is all of its business
income, whether it was earned inside or outside of Alaska; in
essence, worldwide income is pre-tax income (determined without
deducting income taxes assessed by other jurisdictions).  AS
43.20.065; see Gulf Oil Corp. v. State, Dep't of Revenue, 755 P.2d
372, 375 (Alaska 1988).  


Footnote 9:

     These three factors are fractions; each is calculated by
dividing the in-state amount of the taxpayer's subject business
activity by the worldwide amount of the taxpayer's subject
activity.  AS 43.19.010, art. IV,  10, 13, 15.  For example, the
property factor is calculated by dividing the average value of the
taxpayer's property owned or rented and used in Alaska during the
tax period by the average value of all of its property owned or
rented and used during that period.  AS 43.19.010, art. IV,  10.

          The formula apportionment method is based on the
assumption that an effective way to fairly measure the locally
taxable income of a multinational business is to compare the value
of its local and worldwide business activities and attribute income
on the basis of that comparison.  Gulf Oil Corp., 755 P.2d at 374-
75.


Footnote 10:

     AS 43.20.065 provides:  

          A taxpayer who has income from business
activity that is taxable both inside and outside the state or
income from other sources both inside and outside the state shall
allocate and apportion net income as provided in AS 43.19
(Multistate Tax Compact), or as provided by this chapter.  


Footnote 11:

     AS 43.20.071 is entitled "Transportation carriers"and
provides, in pertinent part,

          (a)  All business income of water
transportation carriers shall be apportioned to this state in
accordance with AS 43.19 (Multistate Tax Compact) as modified by
the following:

          . . . . 

               (4)  the portions of the numerator of the
property, payroll, and sales factors which are directly related to
interstate mobile property operations are determined by a ratio
which the number of days spent in ports inside the state bears to
the total number of days spent in ports inside and outside the
state; the term "days spent in ports"does not include periods
where ships are tied up because of strikes or withheld from Alaska
service for repairs, or because of seasonal reduction of service;
days in port are computed by dividing the total number of hours in
all ports by 24. 


Footnote 12:

     We note that all of OBS's ships that called in Alaska were
registered under the U.S. flag; therefore, none of the property,
payroll, or sales of OBS's foreign flag ships was included in the
numerator of the property/payroll/sales apportionment fraction.  


Footnote 13:

     In so holding, we reject arguments, advanced by OBS and AVA,
that legislative events in 1991 and 1992 establish that the
legislature did not intend to except to section 883.  In 1991 and
1992, the Alaska legislature proposed, but ultimately rejected,
amendments that would have expressly excepted to incorporation of
section 883.  OBS and AVA rely on comments at committee and
subcommittee hearings regarding the proposed legislation in support
of their position that the legislature realized section 883 had
already been incorporated into Alaska law.  Such comments, provided
in context of legislation which was not adopted, offer no insight
into the thinking of the legislature when it enacted AS 43.20.021
in 1975.  See Hillman v. Nationwide Mut. Fire Ins. Co., 758 P.2d
1248, 1252 (Alaska 1988) ("While the legislature is fully empowered
to declare present law by legislation, it is not institutionally
competent to issue opinions as to what a statute passed by an
earlier legislature meant.").  See also Wright v. West, 505 U.S.
277, 295 n.9 (1992); William N. Eskridge, Jr., The New Textualism,
in 2A Norman J. Singer, Sutherland Statutory Construction 568, 578
(5th ed. 1992) (noting the U.S. Supreme Court's "occasional
willingness to consider 'subsequent legislative history,'"but also
noting that the Court has "often iterated that 'the views of a
subsequent Congress form a hazardous basis for inferring the intent
of an earlier one'").   

          Our holding on the exemption issue makes it unnecessary
for us to consider DOR's alternative argument that incorporating
section 883 into Alaska law would discriminate against interstate
commerce.   


Footnote 14:

     DOR claims that the regulation's "first use"requirement is
not at issue here because OBS was not denied a credit on this
basis.  It appears, however, that DOR applied this limitation in
disallowing the credit for OBS ships that did not visit an Alaska
port on their initial voyages.     


Footnote 15:

     Because the Tax Reform Act of 1986, P.L. 99-514, generally
repealed the credit for property placed in service after December
31, 1985, the credit is not applicable to all tax years that are
the subject of this appeal.


Footnote 16:

     AS 43.20.021(d) states, "[w]here a credit allowed under the
Internal Revenue Code is also allowed in computing Alaska income
tax, it is limited to 18 percent for corporations of the amount of
credit determined for federal income tax purposes which is
attributable to Alaska."


Footnote 17:

     AS 43.20.036(b) states, "[f]or purposes of calculating the
income tax payable under this chapter, the taxpayer may apply as a
credit against tax liability the investment credit allowed as to
federal taxes under 26 U.S.C. 38 (Internal Revenue Code) upon only
the first $20,000,000 of qualified investment . . . put into use in
the state for each taxable year."


Footnote 18:

     15 AAC 20.110(d) states:

          For purposes of this section, "placed in
          service in the state"means that the first use
of the qualified investment is in this state. If the property is
used elsewhere in the taxable year of acquisition and brought to
this state during that same year, that property is considered used
property and is subject to the limitations as provided in the
Internal Revenue Code. If the property is to be used elsewhere
during the taxable year of acquisition and brought to this state in
another taxable year, the property does not qualify for the
investment credit. Transportation equipment used within and outside
of this state whose use commences in this state is considered new
property. The qualified expenditure for interstate transportation
equipment must be based on a prorated formula of days used in this
state compared to days used elsewhere.


Footnote 19:

     Even though AS 43.05.080 grants DOR authority to adopt
regulations, it limits that authority to regulations "necessary for
the enforcement of the tax . . . laws administered by it." 
Likewise, if a department has authority to adopt regulations, a
regulation is not valid "unless consistent with the statute and
reasonably necessary"to carry out the statutory purposes.  AS
44.62.030.


Footnote 20:

     "Statutory construction begins with an analysis of the
language of the statute construed in view of its purpose."  Borg-
Warner Corp. v. AVCO Corp., 850 P.2d 628, 633 n.12 (Alaska 1993)
(citation omitted).  "The plainer the language of the statute, the
more convincing any contrary evidence must be."  Id.  


Footnote 21:

     Furthermore, while DOR could have employed a test other than
first use to effectuate legislative intent, this court will not
"substitute [its] judgment for that of the agency with respect to
the efficacy of a regulation nor review the 'wisdom' of a
particular regulation."  Anchorage Sch. Dist. v. Hale, 857 P.2d
1186, 1188 (Alaska 1993) (citation omitted); see also State, Dep't
of Revenue v. Cosio, 858 P.2d 621, 624 (Alaska 1993). 


Footnote 22:

     OBS tersely asserts in a footnote in its brief that the
regulation is potentially unconstitutional, on the theory that it
burdens interstate transportation property.  It also asserts that
the statutes should be interpreted to avoid unconstitutionality.
Although this cursory treatment does not justify our substantive
consideration of the issue, it appears to us that the regulation
and the statutory scheme are internally consistent, and would not
result in taxation of more than all of a unitary business's income
if every taxing jurisdiction adopted identical provisions.  See
Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983). 
In that case, the Court defined "internal consistency,"stating,
"[t]he first, and again obvious, component of fairness in an
apportionment formula is what might be called internal consistency
-- that is, the formula must be such that, if applied by every
jurisdiction, it would result in no more than all of the unitary
business income being taxed."  Id. at 169; see also Trinova Corp.
v. Michigan Dep't of Treasury, 498 U.S. 358, 380 (1991).  


Footnote 23:

     The only investment income in dispute is that of the
investment companies.  The taxpayer confirms in its brief that it
does not assert on appeal that any part of its own investment
income is not apportionable income.


Footnote 24:

     Whether DOR properly characterized particular investment
income of OBS's investment companies as "business"or operational
income subject to apportionment presents a mixed question of law
and fact.  The legal question raises issues of constitutional and
statutory interpretation which we review with our independent
judgment.  See Allied-Signal v. Director, Div. of Taxation, 504
U.S. 768 (1992); Earth Resources Co. v. State, Dep't of Revenue,
665 P.2d 960, 965 n.8 (Alaska 1983).  We will uphold an agency's
findings of fact if they are supported by substantial evidence. 
Handley v. State, Dep't of Revenue, 838 P.2d 1231, 1233 (Alaska
1992).  Substantial evidence is "such relevant evidence as a
reasonable mind might accept as adequate to support a conclusion." 
Id. (citation omitted).


Footnote 25:

     OBS concedes that its shipping companies had certain "short
term"investments that produced operating capital and long term
investments of non-operating capital.  The auditor also included
the income from those investments as business income.  OBS does not
argue in this appeal that it was error to do so.


Footnote 26:

     AS 43.19.010, art. IV,  9 states, "All business income shall
be apportioned to this state by multiplying the income by a
fraction, the numerator of which is the property factor plus the
payroll factor plus the sales factor, and the denominator of which
is three."


Footnote 27:

     DOR asserts that Alan Carus's supplemental affidavit submitted
to the DOR hearing officer was untimely and was filed "over the
objection of the division."  However, as OBS correctly notes, OBS
requested permission to supplement the record and to file a post-
hearing brief after the Supreme Court decided Allied-Signal, 504
U.S. 768, and the hearing officer granted that request.  DOR
initially objected to this request, but later retracted its
objection and chose not to file a responsive brief. Thus, DOR did
not preserve its contention that Carus's supplemental affidavit was
untimely.


Footnote 28:

     The weight given to statements made in an affidavit is
determined by the trier of fact.  See Gregor v. City of Fairbanks,
599 P.2d 743, 746 n.10 (Alaska 1979).


Footnote 29:

     The U.S. Supreme Court in Allied-Signal rejected New Jersey's
request to adopt the UDITPA definition of business income as the
constitutional test.  504 U.S. at 786-87.  The Court also made it
clear that if stock on whose sale a taxpayer realizes a capital
gain served only an "investment"function and not an "operational"
function, the gain is not subject to apportionment for purposes of
that state's corporate tax, even though it may constitute "business
income"under the UDITPA.  Id. at 787-88. 


Footnote 30:

     The hearing officer stated:

               [OBS's] annual reports are replete with
exaltations regarding its strong and highly liquid financial
condition.  It is clear that building its financial strength was a
key component of its overall strategy to be in a position to pursue
opportunities for expansion when they arose.  Its substantial
financial resources, including its investment income, allowed it to
secure long-term borrowing and to incur capital lease obligations
to finance vessel additions, thereby strengthening its competitive
position in both domestic and worldwide bulk shipping markets.

               Under these circumstances, it would be
difficult to conclude that the investment transactions at issue did
not serve an operational function, as required under Allied-Signal.

(Citation omitted.)