SCHLUMBERGER TECHNOLOGY CORPORATION & SUBSIDIARIES, Appellants,
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. Superior Court No. 3AN-10-07367 CI.
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.
The Alaska Net Income Tax Act (ANITA) incorporates certain provisions of the Internal Revenue Code, unless the federal provisions are " excepted to or modified by other provisions" of the act. ANITA requires a corporation to report its income and the income of certain affiliates and to exclude " 80 percent of dividend income received from foreign corporations."  But the Internal Revenue Code has a different formula; it requires a foreign corporation to report only income " effectively connected with the conduct of a trade or business within the United States."  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 1998-2000, 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 Technology. The
auditor also concluded that Schlumberger Limited was a " water's edge" affiliate of Schlumberger Technology. Based on these conclusions, the 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.), 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 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 ...