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You can search the entire site. or go to the recent opinions, or the chronological or subject indices. Schlumberger Technology Corp. & Subsidiaries v. State, Dept. of Revenue (7/18/2014) sp-6924

Schlumberger Technology Corp. & Subsidiaries v. State, Dept. of Revenue (7/18/2014) sp-6924

         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, email  

                                                                                       

         corrections@appellate.courts.state.ak.us.  



                   THE SUPREME COURT OF THE STATE OF ALASKA  



SCHLUMBERGER TECHNOLOGY   )  

CORPORATION & SUBSIDIARIES,  )                                   Supreme Court No. S-14729  

                                                          

                                                       )  

                                                       )         Superior  Court  No.  3AN-10-07367  CI  

                                                                                        

                            Appellants,	               )  

                                                       )         O P I N I O N  

         v.	                                           )  

                                                       )         No. 6924 - July 18, 2014  

STATE OF ALASKA,                                       )  

DEPARTMENT OF REVENUE,                                 )  

                                                       )
  

                            Appellee.                  )
  

                                                       )
  



                  Appeal from the Superior Court of the State of Alaska, Third  

                  Judicial District, Anchorage, Daniel Schally, Judge Pro Tem.  

                                                                      



                  Appearances:      George   R.   Lyle,   Guess   &   Rudd   P.C.,  

                  Anchorage, Charles J. Moll III, San Francisco, California,  

                   and Alan V. Lindquist, Chicago, Illinois, Winston & Strawn  

                                     

                  LLP,  for  Appellants.    R.  Scott  Taylor,  Assistant  Attorney  

                   General, Anchorage, Steve D. DeVries, Assistant Attorney  

                   General,  Anchorage,  and  Michael  C.  Geraghty,  Attorney  

                   General, Juneau, for Appellee.  



                  Before: Fabe, Chief Justice, Winfree, Stowers, Maassen, and  

                                                                                    

                  Bolger, Justices.  



                  BOLGER, Justice.  


----------------------- Page 2-----------------------

I.        INTRODUCTION  



                                                                                                   

                   The Alaska Net Income Tax Act (ANITA) incorporates certain provisions  



                                            

of the Internal Revenue Code, unless the federal provisions are "excepted to or modified  

                                            1   ANITA requires a corporation to report its income and  

by other provisions" of the act.                                                                        



the income of certain affiliates and to exclude "80 percent of dividend income received  

                                                                        

                                       2  But the Internal Revenue Code has a different formula; it  

from foreign corporations."  

                                           



requires a foreign corporation to report only income "effectively connected with the  

conduct of a trade or business within the United States."3  We conclude that this Internal  

                 



Revenue Code provision has not been adopted by reference because it is inconsistent  



with the formula provided by ANITA.  



II.       FACTS AND PROCEEDINGS  



                   Schlumberger  Limited  is  a  multinational  company  incorporated  in  the  



                                                                              

Netherlands Antilles with offices in Paris, New York City, and Texas.  Schlumberger  



                                                               

Limited's only service is the management of its subsidiaries; it receives management fees  



                            

for  this  service.        Schlumberger  Limited  also  receives  dividend  income,  including  



dividends from its foreign subsidiaries.  



                                         

                   Schlumberger Limited conducts its business in Alaska through a wholly  



owned subsidiary, Schlumberger Technology Corporation.  Schlumberger Technology's  



                                                                       

primary business is oilfield services, but it also owns all of Schlumberger Limited's  



                                

associated companies incorporated in the United States and operates all of Schlumberger  



                

Limited's domestic businesses.  Schlumberger Technology files a consolidated federal  



                                                                             

tax return for all of Schlumberger Limited's domestic subsidiaries.  For tax years 1998- 



          1        AS 43.20.021(a).  



          2        AS 43.20.145(a) & (b)(1).  



          3        26 U.S.C.  882(a) & (b) (2012).  



                                                            -2-                                                        6924  


----------------------- Page 3-----------------------

2000, Schlumberger Technology filed Alaska corporate income  tax returns that included  



only the domestic subsidiaries working in the oilfield services business.  



                    In  September  2003,  a  Department  of  Revenue  auditor  concluded  that  



Schlumberger   Limited   was   engaged   in   a   unitary   business   with   Schlumberger  



                   4  

Technology.   The auditor also concluded that Schlumberger Limited was a "water's  



                                                                         5  

edge"  affiliate  of  Schlumberger  Technology.     Based  on  these  conclusions,  the  



          4         "Unitary business" is defined by 15 Alaska Administrative Code (AAC)                        



20.310 (1982) in relevant part as follows:  



                              (a)  A   business   is  unitary  if   the  entity  or  entities  

                    involved   are   owned,   centrally   managed,   or   controlled,  

                    directly or indirectly, under one common direction which can  

                                                                                                 

                    be formal or informal, direct or indirect, or if the operation of  

                                                                                     

                    the portion of the business done within the state is dependent  

                                                                                     

                    upon or contributes to the operation of the business outside  

                                                                                       

                    the state.  



                              (b) The unitary nature of a business is a case-by-case  

                                                                      

                    factual determination and applicable statutes, regulations, and  

                    administrative   and   judicial   precedent   will   be   used   as  

                    guidelines for making the determination.  



          5         AS 43.20.145 states:  



                              (a)  A  corporation  that  is  a  member  of  an  affiliated  

                                                            

                    group  shall  file  a  return  using  the  water's  edge  combined  

                    reporting method.  A return under this section must include  

                    the following corporations if the corporations are part of a  

                    unitary business with the filing corporation:  



                    . . . .  



                                                                                         

                                        (4) a corporation, regardless of the place  

                              where the corporation was incorporated, if the  

                              corporation's           property,       payroll,       and     sales  

                              factors in the United States average 20 percent  

                                                                         

                                                                                                               (continued...)  



                                                               -3-                                                         6924
  


----------------------- Page 4-----------------------

Department   issued   a  notice  of  assessment  for  additional  corporate  income  taxes  of  



$429,739 plus interest.   



                                                                                       

                   Schlumberger Technology submitted a request for an informal conference  



regarding  several  of  the  audit  adjustments,  including  the  auditor's  treatment  of  



                                                  

Schlumberger Limited as a single unitary business with Schlumberger Technology and  



the  inclusion  of  20%  of  Schlumberger  Limited's  dividends  received  from  foreign  



                                                             

corporations in its apportionable income.  The informal conference decision made some  



adjustments  to  Schlumberger  Technology's  tax  liability  but  affirmed  the  auditor's  



conclusion that Schlumberger Technology and Schlumberger Limited were a unitary  



                                                                                                             

business.  The decision also concluded that Schlumberger Technology was required to  



                                             

include 20% of Schlumberger Limited's foreign dividend income in its apportionable  



income.  



                                                                                                      

                   Schlumberger   Technology   filed   a   formal   appeal   to   the   Office   of  



Administrative Hearings contesting several issues from the informal conference decision.  



                                                                                                 

During these proceedings, Schlumberger Technology filed a motion for partial summary  



judgment, arguing  



                                                                                            

                   [t]hat Alaska statutes, after adoption of the Water's Edge Act  

                   (AS 43.20.[145]), do not permit the Department of Revenue  

                   to  assess  the  Taxpayer  based  on  amounts  received  by  a  

                   related foreign corporation (Schlumberger Limited) that were  

                                                                            

                   earned outside the United States, were not connected with a  

                   business conducted in the United States, and were not earned  

                   within the U.S. Water's Edge.                                       



                                              

For the purpose of this motion, Schlumberger Technology asked the administrative law  



                                                                                                     

judge  to  assume  that  Schlumberger  Technology  and  Schlumberger  Limited  were  a  



          5(...continued)  



                             or more.  



                                                            -4-                                                        6924  


----------------------- Page 5-----------------------

                                                                                                                 

unitary  business  under  Alaska  law.    Schlumberger  Technology  argued  that  if  the  



                                                                    

administrative law judge decided in favor of Schlumberger Technology on the water's  



edge issue, it would not be necessary to reach any other issues in the appeal.  



                    The administrative law judge denied Schlumberger Technology's partial  



summary judgment motion, explaining that "Alaska's change to water's edge accounting  



                                                                                            

geographically limited the types of corporations, other than oil and gas corporations, that  



                                                              

were included in the unitary group for the purpose of determining the total apportionable  



                                                   

income." (Emphasis in original)  The administrative law judge stated that the water's  



                                                               

edge statute "did not geographically limit the types of income to be included in the total  



                                                                                                        

apportionable  income  from  the  corporations  included  within  the  unitary  group."  



                  

(Emphasis in original)  Accordingly the administrative law judge ruled that the foreign  



dividends  in  question  were  related  to  Schlumberger  Limited's  regular  business  



operations and that Alaska's apportionment methodology should be applied to determine  



Schlumberger Technology's taxable income.  



                    Shortly after this order, Schlumberger Technology stipulated to "withdraw[]  



                    

its appeal of any disputed issues in its appeal of [the Department's] informal conference  



decision   other   than   those   issues   ruled   on   in   the   order   denying   Schlumberger  



                                                

Technology's partial summary judgment motion," including "issues related to unity,  



                           

business income, or otherwise identified in its Notice of Appeal of Informal Conference  



                                                      

Decision, dated October 20, 2008." On February 10, 2010, the administrative law judge  



                                                                                         

issued   a   final   administrative   order   incorporating   the                         denial   of   Schlumberger  



                                      

Technology's  summary  judgment  motion  and  affirming  the  informal  conference  



decision.  



                    Schlumberger Technology appealed the final administrative order to the  



                                                                                                   

superior court.  The superior court affirmed the administrative law judge's decision that  



Schlumberger  Limited's  foreign  dividends  should  be  included  in  Schlumberger  



                                                              -5-                                                        6924
  


----------------------- Page 6-----------------------

                                                                                                    

Technology's apportionable income.  The superior court determined that Schlumberger  



                                                                                                   

Technology  had  failed  to  preserve  its  argument  that  the  taxation  of  these  foreign  



                   

dividends would violate the Commerce Clause and the Foreign Commerce Clause of the  



United States Constitution because Schlumberger Technology had stipulated to withdraw  



                                                    6  

this issue from consideration.   



III.        STANDARD OF REVIEW  



                                                                                                                            

                       The interpretation of a stipulation is a question of law to which we apply  



                                                7  

our independent judgment.    We also independently review the merits of an agency's  



                                                                                                                                              

decision  when  the  superior  court  is  acting  as  an  intermediate  appellate  court  in  an  



                                      8  

administrative matter.   



                       In a similar case, we ruled that the determination "whether a particular  

                                                                                                                  



[Internal Revenue Code] provision is excepted to or modified by [ANITA] . . . is a matter  

                                                                                                                                  



of  pure  statutory  construction  which  is  not  within  the  particular  expertise  of  the  



                                                                                                                                                      9  

                                                                                                       

[Department of Revenue] and which requires us to exercise our independent judgment." 



In  matters  of  statutory  construction,  we  interpret  "statutes  according  to  reason,  

                                                                                               



            6          Article I, Section 8 of the U.S. Constitution provides in pertinent part: "The     



Congress shall have Power . . . [t]o regulate Commerce with foreign Nations, and among                   

the several States, and with the Indian Tribes."  



            7          DeNardo v. Calista Corp ., 111 P.3d 326, 329 & n.3 (Alaska 2005).  



            8           Griswold v. Homer City Council, 310 P.3d 938, 940 (Alaska 2013) (quoting  



Shea  v.  State,  Dep't  of  Admin.,  Div.  of  Ret.  &  Benefits,  267  P.3d  624,  630  (Alaska  

                                      

2011)).  



            9  

                                                                                                                

                       State, Dep't of Revenue v. OSG Bulk Ships, Inc., 961 P.2d 399, 403 n.6  

(Alaska 1998).  



                                                                         -6-                                                                   6924
  


----------------------- Page 7-----------------------

practicality, and common sense, taking into account the plain meaning and purpose of  

the law as well as the intent of the drafters."10  



IV.       DISCUSSION  



                   Schlumberger Technology argues that under the Internal Revenue Code,  



                                                                                              

domestic corporations are taxed on their worldwide income, but entitled to claim a tax  

credit against their United States income tax liability for taxes paid to foreign countries.11  



                                                           

Foreign corporations, on the other hand, are taxed differently.  Under Internal Revenue  



Code  882, foreign corporations like Schlumberger Limited are taxed only on their  



                                                                                                   

"taxable income which is effectively connected with the conduct of a trade or business  



                                     12  

                                                                                                        

within the United States."              Schlumberger Technology argues that since ANITA has no  



                                                                                 

explicit exception for Internal Revenue Code  882, this sourcing rule is incorporated by  



              13  

reference.        Thus, Schlumberger Technology argues that the foreign dividends paid to  



Schlumberger  Limited  should  not  have  been  included  in  its  taxable  income  under  



ANITA.  



                                                                                                                         

                   In response, the State argues that the provisions of ANITA apply to all  



                                                                                                          

business income of the taxpayer, not just income derived from sources in the United  



          14  

                                                                 

States.       The State argues that ANITA uses the "formula apportionment" described in  



          10       Marathon Oil Co. v. State, Dep't of Natural Res. , 254 P.3d 1078, 1082  



(Alaska  2011)  (quoting Native  Vill.  of  Elim  v.  State ,  990  P.2d  1,  5  (Alaska  1999))  

                                                                                       

(internal quotation marks omitted).  



          11       26 U.S.C.  901(b)(1) (2012).  



          12       26 U.S.C.  882(a)(1) (2012).  



          13       See AS 43.20.021(a).  



          14       Alaska Statute 43.19.010, art. IV  (1)(a) provides:  



                                                                                                         (continued...)  



                                                            -7-                                                      6924
  


----------------------- Page 8-----------------------

                                                                       

the Multistate Tax Compact to calculate the local portion of a taxpayer's business income  



regardless of  United States or foreign origin.  The State thus argues that the sourcing  



                                         

rule  contained  in  Internal  Revenue  Code    882  is  inconsistent  with  this  "formula  



apportionment" methodology.  



                                                          

          A.	      The   Federal   Sourcing   Rules   Governing   Foreign   Dividends   Are  

                   Inconsistent With The Allocation Required By AS 43.20.145(b)(1).  

                   Under ANITA a corporation that is a member of an "affiliated group"15  



                                                                                                            16 

               

must file a return using the "water's edge combined reporting method."                                         Under the  



                     

water's edge combined reporting method, "the only corporations besides the taxpayer  



that may be included in the return" are corporations that are part of a unitary business  



                                                                                                         17  

                                                                                                             In this case,  

with the taxpayer and satisfy certain tests for domestic business activity.  



the  informal  conference  decision  concluded  that  Schlumberger  Technology  and  



                                                            

Schlumberger Limited were members of an affiliated group, that Schlumberger Limited  



was   engaged   in   a   unitary   business   with   Schlumberger   Technology,   and   that  



                                                                        

Schlumberger Limited met the test for domestic activity because its "property, payroll,  



          14(...continued)  



                   "Business income" means income arising from transaction  

                   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.  



          15  

                                                                              

                   An " 'affiliated group' means a group of two or more corporations in which  

                                    

50  percent  or  more  of  the  voting  stock  of  each  member  of  the  group  is  directly  or  

indirectly owned by one or more . . . common owners, or by one or more of the members  

of the group[.]" AS 43.20.145(h)(2).   



          16  

                   AS 43.20.145(a).               



          17       AS 43.20.145(a) & (h)(4).  



                                                             -8-	                                                      6924
  


----------------------- Page 9-----------------------

                                                                                                          18  

and  sales  factors  in  the  United  States  average[d]  20  percent  or  more."                               These  



conclusions are not at issue in this appeal.  



                                                                                       

                   The net business income of an affiliated group is subject to apportionment  

under the Multistate Tax Compact.19  Under the Compact, a corporation's in-state income  



                                                                                   

is  determined  by  multiplying  "[a]ll  business  income"  by  an  apportionment  fraction,  



which is the average of three factors - the property factor, the payroll factor, and the  



                 20  

                                                                

sales factor.        These factors are intended to measure in-state income by comparing a  

corporation's in-state business activities with its worldwide business activities.21  



                                                                                           

                   ANITA adopts by reference certain provisions of the Internal Revenue  



        22                                                         23 

                                                                        

Code,       including the provisions on income taxes                  and the provisions on procedure and  



         18        See AS 43.20.145(a)(4).  



         19        AS 43.19.010; AS 43.20.142.  



         20        AS 43.19.010, art. IV,  9.  



         21        State, Dept. of Revenue v. OSG Bulk Ships, Inc ., 961 P.2d 399, 404 (Alaska   



1998).  In OSG, we explained,  



                   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.  



Id. at 404 n.9.  



         22        See AS 43.20.021(a).  



         23        26 U.S.C.  1-1399 (2012).  



                                                          -9-                                                    6924
  


----------------------- Page 10-----------------------

                       24  

administration.    These provisions have "full force and effect . . . unless excepted to or       



                                                                25  

modified" by other provisions of ANITA.                              



                    But  the  Internal  Revenue  Code  does  not  use  the  same  apportionment  

                                                



formula as the Multistate Tax Compact.  Instead, the Internal Revenue Code uses various  

                                                             



"sourcing rules" to determine whether a taxpayer's income is derived from a source  

inside or outside the United States.26  



                     Schlumberger Technology relies on Internal Revenue Code  882, a rule  

                                                               



that excludes income of foreign corporations not connected to a trade or business within  

                                                                                                          



the United States:  



                    (1) In general. - A foreign corporation engaged in trade or  

                    business  within  the  United  States  during  the  taxable  year  

                    shall be taxable . . . on its taxable income which is effectively  

                                                       

                    connected with the conduct of a trade or business within the  

                                                   

                    United States.  



                    (2)  Determination  of  taxable  income.  -  In  determining  

                    taxable income for purposes of paragraph (1), gross income  

                                 

                    includes only gross income which is effectively connected  

                    with  the  conduct  of  a  trade  or  business  within  the  United  

                               [27] 

                     States.  



                                                                       

This  provision  requires  the  exclusion  of  all  foreign  dividend  income  received  by  a  



                                

foreign corporation  because these dividends are not "effectively connected with the  



conduct of a trade or business within the United States."  



          24        26 U.S.C.  6001-7872 (2012).  



          25        AS 43.20.021(a).  



          26        See 26 U.S.C.  861-865 (general source rules); 26 U.S.C.  871-898  



(nonresident aliens and foreign corporations).  



          27        26 U.S.C.  882(a)(1)-(2).  



                                                               -10-                                                         6924
  


----------------------- Page 11-----------------------

                    Another sourcing provision excludes all dividends received from a foreign  



corporation  if  less  than  25%  of  the  gross  income  of  that  foreign  corporation  was  



                                                                                                                             28  

                                 

effectively connected with the conduct of a trade or business within the United States. 



                                                                                           

Conversely, if the foreign corporation paying the dividends earns 25% or more of its  



gross income in the United States, then the same percentage of its dividends will be  



                                                                    29  

included  in  the  taxpayer's  taxable  income.                           This  means  that  even  a  domestic  



                                                           

corporation receiving dividends from a foreign corporation could exclude a significant  



amount of dividends related to foreign operations.  



                                                                                                     

                    Alaska Statute 43.20.145(b)(1), however, provides for a different method  



                                                   

of calculating the taxable portion of foreign dividends earned by an Alaskan taxpayer.  



                                                                            

This statute simply requires the corporate taxpayer to exclude 80% of dividend income  



received  from  foreign  corporations,  whether  the  reporting  corporation  is  foreign  or  



              30  

                         

domestic.          As noted above, the net business income of the group is then subject to  



                                                                                                        

apportionment  under  the  Multistate  Tax  Compact  to  determine  the  group's  in-state  



income.  



                                                    

                    In State, Department of Revenue v. OSG Bulk Ships, Inc .,  we considered  



a similar conflict - whether Internal Revenue Code  883, the provision which excluded  



                                                                               

foreign shipping income from federal taxable income, had been "excepted to or modified  



                                               31  

                                                                                                  

by" other provisions of ANITA.                     We concluded that it would be inconsistent with the  



          28        26 U.S.C.  861(a)(2)(B).  



          29       Id.  Dividends included in this way will always exceed 25%, because the  



federal  statute  will  include  dividend  income  only  if  at  least   25%  of  the  foreign  

corporation's gross income is connected to trade or business in the United States.  



          30        AS 43.20.145(b)(1).  



          31        961 P.2d 399, 402-403 (Alaska 1998).  



                                                             -11-                                                       6924
  


----------------------- Page 12-----------------------

                                                                                                                    32  

Multistate Tax Compact to exclude "an entire class of foreign-earned income."                                            This  



conclusion remains true despite the developments  we describe below:  the sourcing  



                                                                                                        

provisions of the Internal Revenue Code continue to be fundamentally inconsistent with  



the formula apportionment required by the Multistate Tax Compact.  



                    In this case, the Internal Revenue Code sourcing provisions exclude most  



                                                                                                             

dividends related to foreign operations, and exclude all foreign dividends received by a  



foreign corporation.  Alaska Statute 43.20.145(b)(1) excludes 80% of foreign dividends,  



                                                                                                    

but makes no distinction for foreign dividends received by a foreign corporation.  These  



                                                                       

two formulas are simply inconsistent.  We thus conclude that the formula provided by  



                                                              

AS 43.20.145(b)(1) is an exception to the Internal Revenue Code provisions that would  



otherwise be incorporated by reference.  



          B.	       The Adoption Of The "Water's Edge" Statute Did Not Change The  

                    Types Of Income That Must Be Reported.    



                                                                        

                    In 1991 the legislature adopted the "water's edge" method for calculating  



                                                              33  

taxable income for affiliated corporations.                       Alaska Statute 43.20.145(a) provides that  



                                                                         

a corporation "shall file a return using the water's edge combined reporting method" and  



                                                                               

defines the members of the affiliated group that must be included on a taxpayer's return  



                                             34  

                                                 The "water's edge" statute generally excludes "foreign  

using the water's edge method. 



                                                                                                                

companies that do not conduct at least 20% of their business activities in the United  



           35  

States."          Schlumberger  Technology  argues  that  the  rationale  of  OSG  has  been  



          32       Id.    



          33        Ch. 11,  1-4, SLA 1991.  



          34        AS 43.20.145(a)(1).  



          35	      Id.  



                                                             -12-	                                                      6924
  


----------------------- Page 13-----------------------

superseded by this legislation, explaining that the exclusion of foreign companies in the            



water's edge statute is evidence of a legislative intent to exclude all foreign income.   



                                                                    

                     In the agency proceedings, the administrative law judge concluded that  



"Alaska's  change  to  water's  edge  accounting  geographically  limited  the  types  of  



                                                                                               

corporations, other than oil and gas corporations, that were included in the unitary group  



for the purpose of determining the total apportionable income." (Emphasis in original.)  



                                                                                

The  administrative  law  judge  explained  that  the  water's  edge  statute  "did  not  



                                                                                                  

geographically limit the types of income to be included in the total apportionable income  



                                                                                                                       

from  the  corporations  included  within  the  unitary  group."  (Emphasis  in  original.)  



                                                   

                     This construction is consistent with the language that the legislature used  



to define the critical term in this statute: " 'water's edge combined reporting method'  



means a reporting method in which the only corporations besides the taxpayer that may  



                                                                                                                              36  

                                                                                                                                     This  

be  included  in  the  return  are  the  corporations  listed  in  [AS  43.20.145(a)]." 



                                                                                                     

language limits the corporations that must be joined in a return; it does not limit the types  



of income that must be reported.  



                                                                  

                     In addition, the section of the statute that provides for the allocation of  



                                                                                                                                        37  

                                                                                                 

foreign dividends was included in the same enactment as the water's edge amendment. 



                                                                                       

This section provides for the exclusion of only 80% of the dividend income received  



                                            38  

                                                                                                                       

from foreign corporations.                       It thus seems unlikely that the legislature intended  the  



                                                                     

water's edge amendment to have the effect of excluding all dividend income received by  



    

a foreign corporation.  To give effect to both of these provisions we must adopt the same  



construction  as  the  administrative  law  judge  -  the  water's  edge  provision  in  AS  



           36        AS 43.20.145(h)(4).  



           37         Ch. 11,  3, SLA 1991.  



           38        See AS 43.20.145(b)(1).  



                                                                  -13-                                                                 6924  


----------------------- Page 14-----------------------

45.20.145(a)  was  intended  to   designate  the  corporations  that  must  be  joined  in  a  



taxpayer's  return,  and  the  allocation  provision  in  AS  45.20.145(b)  was  intended  to  



designate  the  portion  of  the  foreign  dividend  income  to  be  reported  by  those  



                                                              

corporations.  Construed in this fashion, the water's edge provision is consistent with our  



decision in OSG.  



                                                                                    

          C.	      The  Legislature  Did  Not  Incorporate  All  Of  The  Federal  Sourcing  

                   Rules When It Passed AS 43.20.021(h).  

                                                39 the legislature passed an amendment to ANITA,  

                   In response to  OSG,  



                                                                                

which provides, "Nothing in this chapter or in AS 43.19 (Multistate Tax Compact) may  



                                                                                                  40  

be construed as an exception to or modification of 26 U.S.C. 883."                                    Schlumberger  



Technology argues that by passing this amendment, the legislature required that the  



                                                

federal sourcing provisions must be followed when computing Alaska taxable income.  



                   Schlumberger Technology's argument goes too far. The language of the  



                                              

statute refers to 26 U.S.C.  883, which excludes from gross income "[i]ncome of foreign  

corporations from ships and aircraft"41 and "[e]arnings derived from communications  



                          42  

satellite  systems."            These  exclusions  are  specific  to  narrow  categories  of  income  



                                                                                                            

derived from specific sources.  Nothing in the language of AS 43.20.021(h) purports to  



                                                         

dismantle the provisions of ANITA that incorporate the apportionment formula required  



                                                                                                            

by the Multistate Tax Compact.  Moreover, the language of this statute does not refer to  



                                                      

our conclusion in OSG that the term "all business income" as used in ANITA and the  



         39        Minutes, House Labor & Commerce Comm. Hearing on H.B. 472, 20th  



Leg. (Mar. 30, 1998).  



         40        AS 43.20.021(h).  



         41        26 U.S.C.  883(a).  



         42        26 U.S.C.  883(b).  



                                                          -14-	                                                    6924
  


----------------------- Page 15-----------------------

Multistate Tax Compact "encompasses all income of a business origin, without reduction  



                                                                     43  

for any class of income of foreign origin."                              



                      Schlumberger Technology argues that "if [Internal Revenue Code]  



Section 883 has been adopted by AS 43.20.021(a), [then Internal Revenue Code] Section  



882, of which Section 883 is merely a 'subset,' cannot be 'impliedly' excepted from  



adoption by AS 43.20.021(a)."  We disagree. The legislature apparently made a decision  



to incorporate the income exclusions contained in  883 for certain categories of foreign  



                

income.  But this decision does not change the fact that the federal sourcing rules are  



                                               

generally inconsistent with the apportionment formula required by ANITA. And the  



                                                                                               

exclusion of other categories of foreign income does not change the fact that the total  



                                                                                                  

exclusion of foreign dividends under Internal Revenue Code  882 is simply inconsistent  



with the 80% exclusion provided by AS 43.20.145(b)(1).  



                                                

           D.	        Schlumberger Technology Intentionally Withdrew Its Constitutional  

                      Claim.  



                      Finally,  Schlumberger  Technology  argues  that  ANITA  violates  the  



                                                                            

Interstate Commerce Clause and the Foreign Commerce Clause of the United States  



Constitution  because  the  statute  discriminates  against  dividends  paid  by  foreign  



                                                                                                          44  

corporations in favor of dividends paid by domestic corporations.                                             The State responds  



                                                                                                                         

that  Schlumberger  withdrew  this  claim  in  a  stipulation  filed  during  the  agency  



proceedings.  The superior court agreed with the State, concluding that Schlumberger  



Technology waived this claim.  



           43         State, Dep't of Revenue v. OSG Bulk Ships, Inc.                            , 961 P.2d 399, 405 (Alaska   



1998).  



           44         See, e.g., Kraft Gen. Foods, Inc. v. Iowa Dep't of Revenue & Fin ., 505 U.S.  



71, 75 (1992).  



                                                                   -15-	                                                                 6924  


----------------------- Page 16-----------------------

                     The record reflects that Schlumberger Technology did raise this claim in  

                                       



                                                                                             45  

its notice of appeal to the office of administrative hearings.                                   As detailed above, the  

                                



administrative law judge denied Schlumberger Technology's motion for a summary  

                                                                                                              



ruling that ANITA excluded foreign dividends received by a foreign corporation that is  

                                                                                            



part of a taxpayer's affiliated group.  After this denial order, the parties entered into a  



                  

stipulation  that  stated  that  "Schlumberger  [Technology]  hereby  withdraws  .  .  .  any  



                                                                   

potential disputed issues not addressed [in the denial order] including any such issues .  



   

.  .  otherwise  identified  in  its  Notice  of  Appeal[.]"    The  administrative  law  judge  



accordingly  entered  a  final  decision  in  the  State's  favor,  noting  that  Schlumberger  



                                                                          

Technology "maintains the right to appeal the issues ruled on in [the denial] order."  



                                            

                     Schlumberger Technology contends that it did not explicitly waive this  



constitutional argument.  But the stipulation submitted to the administrative law judge  



                                                                         

specifically withdrew any issues that were not addressed in the denial order, including  



                                                         

any issues identified in the notice of appeal.  The notice of appeal specifically included  



                                                                                               

this constitutional issue, but the denial order did not address it.  Therefore, the stipulation  



to  conclude  the  agency  proceedings  also  withdrew  the  constitutional  issue  that  



Schlumberger Technology is now attempting to raise.   



                                                                                                              

                    Furthermore, the State asserts that, given the opportunity, it could make a  



                                                                                     

factual record that ANITA contains sufficient "taxing symmetry" to satisfy the federal  



                                                                                                         

constitution.    Thus,  it  is  not  appropriate  in  this  case  for  us  to  address  this  issue  



independently of the administrative process.  We generally require an administrative  



claimant to exhaust its administrative remedies before making a claim in court, unless  



          45  

                                                                                                                   

                     Paragraph 3 of the notice of appeal states:  "Taxpayer contests the disparate  

treatment  afforded  domestic  corporations  allowing  for  greater  dividend  received  

                           

deductions than allowed for foreign corporations, and the failure to provide requisite  

mitigating factor relief."  



                                                               -16-                                                              6924  


----------------------- Page 17-----------------------

                                                                                                              46  

                                                                 

the claim involves only a pure issue of law that requires no factual context.                                     When  



                                                                                                          

considering constitutional questions in the context of agency adjudication we have said  



that  



                   requiring  exhaustion  is  particularly  appropriate  where  a  

                   complainant raises both constitutional and non-constitutional  

                                                                             

                   issues . . . because successful pursuit of a claim through the  

                   administrative  process  could  obviate  the  need  for  judicial  

                                                                    [47]  

                   review of the constitutional issues.                   



The potential factual dispute here supports our decision to hold Schlumberger to the  



terms  of  its  stipulation.    We  agree  with  the  superior  court's  conclusion  that  this  



constitutional issue was intentionally withdrawn.  



V.        CONCLUSION  



                                                                               

                   We  conclude  that  the  Internal  Revenue  Code  provision  that  requires  a  



foreign corporation to report only income "connected with the conduct of a trade or  



business  within  the  United  States"  has  not  been  adopted  by  reference  because  it  is  



                                                                          

inconsistent with the formula provided by ANITA. We also conclude that Schlumberger  



                                                                                         

Technology intentionally withdrew its claim that this reading of ANITA would violate  



the United States Constitution.  We therefore AFFIRM the superior court's decision  



affirming the decision of the Department of Revenue.  



         46        See Doubleday v. State, Commercial Fisheries Entry Comm'n, 238 P.3d  



100, 107 (Alaska 2010) (stating that "only the purest legal questions, requiring no factual  

                                                                                                              

context, are exempt from the exhaustion requirement").  



          47       Standard Alaska Prod. Co. v. State, Dep't of Revenue, 773 P.2d 201, 207  

                                                                                                  

(Alaska 1989) (citing Ben Lomond, Inc. v. Municipality of Anchorage , 761 P.2d 119, 122  

(Alaska 1988)).  



                                                           -17-                                                        6924  

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