Supreme Court of the United States
IDAHO STATE TAX COMMISSION
Decided June 29, 1982
Justice O’Connor, Dissenting
|Topic: Economic Activity*||Court vote: 6–3|
Click any Justice for detailJoining O'Connor opinion: Justice BLACKMUN Justice REHNQUIST
|Citation: 458 U.S. 307||Docket: 80–2015||Audio: Listen to this case's oral arguments at Oyez|
* As categorized by the Washington University Law Supreme Court Database
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JUSTICE O'CONNOR, with whom JUSTICE BLACKMUN and JUSTICE REHNQUIST join, dissenting.
The Court today declares that the Due Process Clause of the Constitution forbids a State to tax a proportionate share of the investment income of a nondomiciliary corporation doing business within its borders. In so doing, the Court groundlessly strikes down the eminently reasonable assertion of Idaho's taxing power at issue in this case. Far more dismaying, however, is that the Court's reliance on the Due Process Clause may deprive Congress of the authority necessary to rationalize the joint taxation of interstate commerce by the 50 States.
Today, the taxpayer wins. Yet in the end, today's decision may prove to be a loss for all concerned -interstate businesses themselves, which the Commerce Clause guarantees the opportunity to serve the country's needs unimpeded by a parochial hodgepodge of overlapping and conflicting tax levies; the Nation, which demands a prosperous interstate market; and the States, which deserve fair return for the advantages they afford interstate enterprise. For while this Court has the authority to invalidate a specific state tax, only Congress has both the ability to canvass the myriad facts and factors relevant to interstate taxation and the power to shape a nationwide system that would guarantee the States fair revenues and offer interstate businesses freedom from strangulation by multiple paperwork and tax burdens. Unfortunately, by apparently stripping Congress of the authority to do the job, the Court delays the day when a uniform system responsive to the needs of all can be fashioned.
The Court has strayed "beyond the extremely limited restrictions that the Constitution places" on the taxing power of the States, "inject[ed itself] in a merely negative way into the delicate processes of fiscal policymaking," and regrettably "imprison[ed] the taxing power of the states within formulas that are not compelled by the Constitution." Wisconsin v. J. C. Penney Co., 311 U. S. 435, 311 U. S. 445 (1940). I respectfully dissent.
"Taxes," as Justice Holmes once observed, "are what we pay for civilized society." Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U. S. 87, 275 U. S. 100 (1927) (dissenting opinion). A natural corollary of this proposition is that the Due Process Clause permits state taxation if "the state has given anything for which it can ask return." Wisconsin v. J. C. Penney Co., 311 U.S. at 311 U. S. 444. A State thus "is free to pursue its own fiscal policies, unembarrassed by the Constitution," if it
exert[s] its power in relation to opportunities which it has given, to protection which it has afforded, [or] to benefits which it has conferred by the fact of being an orderly, civilized society.
In applying this fundamental principle to businesses that derive income from more than one State, we repeatedly have declared that a state tax passes constitutional muster unless the taxpayer can show that there is not even "a minimal connection' between [its] interstate activities and the taxing State," or a merely "rational relationship between the income attributed to the State and the intrastate values of [its] enterprise." Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U. S. 425, 445 U. S. 436 -437 (1980) (quoting Moorman Mfg. Co. v. Bair, 437 U. S. 267, 437 U. S. 272 -273 (1978)). As the present case demonstrates, however, this oft-repeated formula is more easily stated than applied when a State attempts to tax the net income of an enterprise doing business in many jurisdictions.
The principal difficulty arises because a multijurisdictional business is "an organic system," Wallace v. Hines, 253 U.S. 66, 253 U. S. 69 (1920) (Holmes, J.), whose income cannot sensibly be reduced to the sum of the hypothetical incomes of distinct component parts, each wrenched from the unitary whole and conceptually confined to operations within a single State. [ Footnote 2/1 ] With this understanding in mind, for more than half a century, we have held that a State is not constitutionally required to tax only that slice of an interstate enterprise operating physically within the State. See, e.g., Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm'n, 266 U. S. 271 (1924); Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U. S. 207 (1980). Instead, as we stated only two Terms ago,
[i]t has long been settled that 'the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs,'
id. at 447 U. S. 219 (quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U. S. 450, 358 U. S. 460 (1959)), provided only that, in each case, the resulting tax liability is not " out of all appropriate proportion to the business transacted'" in the taxing State itself, 447 U.S. at 447 U. S. 220 (quoting Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U. S. 123, 283 U. S. 135 (1931)).
In short, the "linchpin" of apportioned state taxation is the concept of an organic, unitary business. Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, at 445 U. S. 439. The constitutionality of a state tax levied on extraterritorial business operations thus turns on whether the out-of-state business activity can be characterized as a separate business with no in-state contacts or whether, instead, it is a part of a unitary enterprise doing business in the State. In the case before us, the Court first errs when it attempts to determine whether or not ASARCO's investments were part of ASARCO's unitary nonferrous metals business.
ASARCO realized capital gains, dividends, and interest income from its ownership of securities issued by five foreign subsidiaries. The issue for the Court is whether that income was earned by ASARCO's unitary nonferrous metals business, and therefore was subject to Idaho's taxes, or instead was earned by a separate investment business unrelated to ASARCO's operations in Idaho, and therefore was constitutionally exempt from taxation by that State. As always, of course, the State's taxation of the company's income is presumptively constitutional. To overcome that presumption, ASARCO has the " distinct burden of showing by "clear and cogent evidence"'" that Idaho's scheme "`results in extraterritorial values being taxed.'" Exxon Corp. v. Wisconsin Dept. of Revenue, supra, at 447 U. S. 221 (quoting Butler Bros. v. McColgan, 315 U. S. 501, 315 U. S. 507 (1942), in turn quoting Norfolk & Western R. Co. v. North Carolina ex rel. Maxwell, 297 U. S. 682, 297 U. S. 688 (1936)).
According to the Court, ASARCO has met this burden by showing that, during the relevant tax years, its holdings in the five subsidiaries were passive investments not functionally integrated with ASARCO's nonferrous metals business. On this basis, the Court concludes that ASARCO's holdings were, in effect, part of a separate investment business having too little to do with ASARCO's unitary nonferrous metals business to support apportioned taxation.
Both common sense and business reality dictate a different result. ASARCO, far from showing that its investment holdings were part of an "unrelated," [ Footnote 2/2 ] "discrete business enterprise," [ Footnote 2/3 ] "hav[ing] nothing to do with the activities" [ Footnote 2/4 ] of its unitary nonferrous metals business, has failed in at least three ways to bear its "distinct burden" of demonstrating that Idaho's tax was unconstitutionally levied.
First, even accepting arguendo the Court's conclusion that the contested income was derived from passive investments, ASARCO has failed to show that its investment decisionmaking was segregated from its nonferrous metals business. ASARCO cannot deny that the subsidiary companies in which it invested were participants in the nonferrous metals industry, the very industry in which ASARCO played a major operational role. As the Court acknowledges, ASARCO "mine[d], smelt[ed], and refine[d]... nonferrous metals such as copper, gold, silver, lead, and zinc," ante at 458 U. S. 309, while one of its subsidiaries "engaged in the mining, milling, smelting, and refining of nonferrous metals," ante at 458 U. S. 309, n. 2, another engaged "in the same general line of business" as did "ASARCO in the United States," ibid., a third "mine[d] and smelt[ed] copper," ante at 458 U. S. 309 -310, n. 2, and the last two were important "ASARCO customers," ante at 458 U. S. 323, fabricating, respectively, cables and copper wares, ante at 458 U. S. 309, n. 2. In short, ASARCO invested not in "unrelated business[es]," such as hotel chains and breweries, but in companies participating in the nonferrous metals markets. Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. at 447 U. S. 224 (quoting Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. at 445 U. S. 442 ).
ASARCO invested in these nonferrous metals companies with a well-founded confidence that few other investors could muster, since much of what it had learned in operating its own nonferrous metals business must have been invaluable in evaluating the prospects for other companies engaged in similar businesses and markets worldwide. Put another way, it would have been a perverse act of self-denial for ASARCO to ignore its intimate knowledge of world markets, refining and smelting technology, mining operations, and geological reserves when it decided whether and how to invest in the five companies of concern here. Thus, the investment decisions ASARCO made regarding the securities of these five participants in the nonferrous metals markets undoubtedly depended heavily on ASARCO's knowledge of its own business.
In fact, during the course of this litigation, ASARCO has admitted as much. In the trial court, ASARCO's vice-president and comptroller answered questions put to him by ASARCO's counsel as follows:
Q. Now, ASARCO has investments in a lot of mining companies, does it not? A. Yes. Q. Can you tell the court why ASARCO makes investments of this nature? A. The ASARCO management utilizes its expertizes [sic ] in channeling funds into these areas where they are knowledgeable and -most knowledgeable -and hopefully accrue [ sic] to the benefit of ASARCO stockholders. Q. So that essentially ASARCO feels that it can use its expertizes [sic ] to produce the maximum returns for its shareholders?
"A. That is correct. " "Q. And whereas, with other purchases, I suppose ASARCO feels that the shareholders can make the investments themselves as well as ASARCO can?"
Record 81-82. Moreover, in its brief to the Supreme Court of Idaho, ASARCO flatly stated that
[i]t invests its shareholders' money in businesses in which it has expertise and distributes the investment return in the form of dividends to its shareholders.
Id. at 521.
In sum, far from showing by "clear and cogent evidence" that its investment decisions regarding other nonferrous metal suppliers and users were segregated from the resources of information and expertise developed in its own nonferrous metals business, ASARCO itself provided evidence that its investment decisionmaking was part of an indivisible, unitary nonferrous metals business. This alone warrants affirming the Idaho Supreme Court's due process ruling.
Second, again assuming arguendo that the contested investments were in fact passive, ASARCO has failed to show that its holdings were divorced from its management of the financial requirements of its nonferrous metals business. For all we know, ASARCO's investments were triggered by its need to obtain a return on idle financial resources accumulated for the future operation of its own primary business.
ASARCO does not, and could not, contend that all its investment income is, per se, beyond the taxing power of the nondomiciliary States in which it operates. Rather, it concedes that the Due Process Clause permits Idaho to tax, on an apportioned basis, the income ASARCO earned on short-term investments of its working capital. [ Footnote 2/5 ] After all, an appropriate amount of liquid working capital is necessary to the day-to-day operation of a business, and any return earned from its temporary investment is a byproduct of the operation of the business. ASARCO thus admits that Idaho could tax a portion of the income realized from an investment in, say, short-term commercial paper, even though the underlying operations of the issuing companies were far less related to ASARCO's nonferrous metals business than the operations of the five subsidiaries at issue here.
The interim investment of retained earnings prior to their commitment to a major corporate project, however, merely recapitulates on a grander scale the short-term investment of working capital prior to its commitment to the daily financial needs of the company. Just as companies prefer to maintain a cushion of working capital rather than resort to the short-term capital markets on an hourly basis for the money necessary to operate their businesses, many enterprises prefer to acquire the capital necessary for the expansion and replacement of plants and equipment by creating long-term funds, rather than resort to the vagaries of the capital markets. In order to prevent the accumulating capital from sitting idle, such funds are usually invested in financial assets with a degree of liquidity appropriate to the money's intended ultimate use. [ Footnote 2/6 ] Any return ASARCO earned on such investments plainly would be functionally related to the conduct of its nonferrous metals business and, therefore, taxable by Idaho on an apportioned basis as unitary business income.
Such investment of idle funds, after all, mirrors the borrowing of funds a company lacks. Undoubtedly, ASARCO would be quick to assert that any long-term borrowing recorded on the liability side of its balance sheet is an integral part of its unitary business justifying the deduction of interest expense in the computation of apportionable net income. If so, ASARCO cannot contend that the long-term investments recorded on the asset side of its balance sheet are automatically separate from its unitary business, thereby justifying the exclusion of the revenues received from apportionable net income. The same principles apply whether the money is going in or coming out.
Thus, because investments of ASARCO's working capital are functionally integrated with its unitary nonferrous metals business, and because ASARCO failed to show by "clear and cogent evidence" the facts necessary to distinguish, on a principled basis, its investments in the securities of the five subsidiaries at issue here, [ Footnote 2/7 ] the Idaho Supreme Court correctly concluded that apportioned taxation of ASARCO's contested investment income does not violate the Due Process Clause.
Finally, the Court errs even in its fundamental determination that ASARCO's holdings were passive investments unrelated to ASARCO's operational business. In fact, the disputed investments actively contributed to ASARCO's nonferrous metals business.
To begin with, ASARCO had effective operational control of at least three of the five subsidiaries. ASARCO's commanding 52.7% interest in M. I. M. Holdings, Ltd., uncontestably gave it full control of that company. Although ASARCO did not wield quite the same power over Southern Peru Copper, its 51.5% interest nonetheless gave it unilateral veto power over all corporate decisions, including those supported unanimously by all other shareholders. [ Footnote 2/8 ] Finally, in the case of ASARCO Mexicana, the record discloses only that ASARCO had been forced to sell 51% of its initial 100% interest to Mexican nationals, retaining a 49% interest for itself. ASARCO has made no showing that it is not the principal investor in Mexicana, and thus able to control the company. In sum, ASARCO undoubtedly was the dominant factor in at least three of the five subsidiaries under consideration here, with the power to use them to advantage in its nonferrous metals business. [ Footnote 2/9 ] The Court, however, minimizes the significance of this control, emphasizing that ASARCO did not openly and aggressively assert its control during the tax years in question, and concluding that ASARCO's subsidiaries did not contribute to its nonferrous metals business.
The Court's result is hard to understand in view of our decision just two years ago in Exxon Corp. v. Wisconsin Dept. of Revenue. In summarizing our result in Exxon, we asserted that the "important link" establishing the unity of Exxon's business "most clearly" was based on two factors. 447 U.S. at 447 U. S. 224.
First, we noted that " placing individual segments under one corporate entity... provide[s] greater profits stability'" because
'nonparallel and nonmutual economic factors which may affect one department may be offset by the factors existing in another department.'
Id. at 447 U. S. 225 (quoting the testimony of an Exxon senior vice-president). ASARCO's ownership of subsidiaries doing business in precisely ASARCO's line of work in two different geographical markets, M. I. M. Holdings in Australia and ASARCO Mexicana in Mexico, undoubtedly provided exactly that sort of advantage; economic conditions in Australia and Mexico do not track those in the United States, so that, when the nonferrous metals business is in the doldrums in one country, it may be prospering in another. But, unlike the Exxon Court, today's Court is blind to the significance to the "profits stability" of ASARCO's nonferrous metals business of its subsidiaries in unrelated geographical markets.
Second, in Exxon, we noted that the vertical relationship between the various departments in Exxon's business provided both "an assured supply of raw materials" and an "assured and stable outlet for products" so that Exxon could "minimiz[e]" the "risk of disruptions" "due to [the] supply and demand imbalances that may occur from time to time." Ibid. The Exxon Court's recognition of the business importance of captive suppliers and customers merely confirmed our earlier decision in Mobil Oil, in which we affirmed Vermont's apportioned taxation of the more than $115 million in dividend income Mobil had received from its 10% interest in the Arabian American Oil Co. 445 U.S. at 445 U. S. 457, n. 10 (STEVENS, J., dissenting). Mobil's 10% investment, apart from providing handsome dividends, apparently had helped to assure Mobil of supplies of crude oil for its petroleum business. By contrast, the Court today inexplicably invalidates Idaho's taxation of ASARCO's dividend income from its fivefold greater 51.5% interest in Southern Peru Copper Corp., an investment that evidently helped to assure ASARCO of supplies of unrefined copper, since 35% of the entire copper output of Southern Peru was sold to ASARCO. [ Footnote 2/10 ]
Apparently, the Court no longer believes it significant that the subsidiaries in which a parent has major holdings "minimiz[e]" the "risk of disruptions" "due to [the] supply and demand imbalances that may occur from time to time," Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. at 447 U. S. 225, by providing "assured suppl[ies]" and "stable outlet[s]," ibid., unless the subsidiaries are actively managed on a day-to-day basis. The Court evidently would find that ASARCO's subsidiaries were part of ASARCO's unitary business only if ASARCO experienced a "supply and demand imbalanc[e]" sufficiently severe to force it to exercise day-to-day control of its captive subsidiaries. In this regard, the Court's position is akin to the view that a paid-up fire insurance policy is a worthless asset unless smoke is in the air.
In sum, despite ASARCO's failure on each of the three counts just discussed to bear its "distinct burden" of showing that its investments are unrelated to its nonferrous metals business, the Court rules that Idaho cannot tax the investment income at issue here. In so doing, the Court unwisely substitutes for the multifaceted analysis used to determine whether the businesses in Mobil Oil and Exxon were unitary the oversimplified test of active operational control. The result is that the Court has ignored business advantages to ASARCO more than sufficient to establish that its holdings in its subsidiaries were part of its unitary business. In consequence, the Court wrongly concludes that ASARCO has borne the "distinct burden" of showing that its holdings in the five affected subsidiaries are not functionally related to the income of its operational nonferrous metals business. [ Footnote 2/11 ]
Trying to justify that result, the Court suggests that for it to hold otherwise "would destroy the concept" of a unitary business by expanding the idea until it "becomes no limitation at all" on the power of the States to tax. Ante at 458 U. S. 326. In actuality, the Court's decision today shrinks the concept beyond all recognition. Thus, it is the Court's holding, not Idaho's tax, that menaces the unitary business principle. The "linchpin" is loose from the axle.
As a natural consequence of its decision that Idaho cannot tax ASARCO's investment income, the Court simultaneously, if implicitly, rules out taxation of the disputed income by any other nondomiciliary State in which ASARCO conducts its nonferrous metals business, absent a special connection between the would-be taxing State and ASARCO's investments. [ Footnote 2/12 ] By the process of elimination, then, the Court's holding provides a partial answer to the question of which State or States the Constitution permits to tax this income. The answer the Court gives, however, demonstrates how ill-advised is the course on which it embarks. By its analysis, the Court leaves open three possible choices regarding which States, if any, may tax ASARCO's contested income. Each of these possibilities suffers from crippling defects, pointing to the conclusion that the Court errs in prohibiting apportioned taxation of investment income by nondomiciliary States.
First, there is the disturbing possibility that no State could satisfy the requirements of the Due Process Clause as interpreted today by the Court, so that the contested income would be, in the words of state tax administrators, "nowhere income." [ Footnote 2/13 ] If so, today's holding casts a deep shadow on the ability of the States to tax their fair share of the corporate income they help to produce by providing an "orderly, civilized society." Even more disturbing, given such an interpretation, the Court's decision endangers even federal taxation of passive investment income, since the Federal Government's contacts with the income at issue here obviously cannot exceed the sum of the contacts of the various States. Presumably, the Court's opinion should not be read as erecting so high a hurdle to state and federal taxation.
Second, there is the possibility that only a domiciliary State or States could tax the disputed income. In Mobil Oil, the Court stated that
"[t]axation by apportionment and taxation by allocation to a single situs are theoretically incommensurate, and if the latter method is constitutionally preferred, a tax based on the former cannot be sustained. " 445 U.S. at 445 U. S. 444 -445 (emphasis added). If so, the converse may also be true: if taxation by apportionment is constitutionally condemned, taxation by allocation to a single situs may be constitutionally preferred. The Court's decision today thus could be read as broadly hinting that a domiciliary State enjoys a preference of constitutional dimension justifying its -and only its -taxation of income such as that derived from ASARCO's investments.
Perhaps such a preference could find some blessing in tradition, but certainly not in logic or in the recent opinions of this Court. In Mobil Oil itself, the Court declared:
We find no adequate justification... for such a preference. Although a fictionalized situs for intangible property sometimes has been invoked to avoid multiple taxation of ownership, there is nothing talismanic about the concepts of 'business situs' or 'commercial domicile' that automatically renders those concepts applicable when taxation of income from intangibles is at issue. The Court has observed that the maxim mobilia sequuntur personam, upon which these fictions of situs are based, 'states a rule without disclosing the reasons for it.' The Court also has recognized that 'the reason for a single place of taxation no longer obtains' when the taxpayer's activities with respect to the intangible property involve relations with more than one jurisdiction.... Moreover, cases upholding allocation to a single situs for property tax purposes have distinguished income tax situations where the apportionment principle prevails.
Id. at 445 U. S. 445 (citations omitted).
The Court thus made clear only two years ago that a State of domicile cannot expect automatically to meet the due process requirements for the taxation of investment income. As with a nondomiciliary State, a domiciliary State may tax investment income only if it confers benefits on or affords protection to the investment activity. Mere assertion of the arbitrary legal fiction that intangible property is located at its owner's domicile no longer suffices to repel a reluctant taxpayer's due process attack.
The principal functional basis on which this Court has justified taxation by the commercial domicile, moreover, actually supports the fully apportioned taxation of investment income that today's decision rules out, rather than taxation by allocation to a single situs. In Wheeling Steel Corp. v. Fox, 298 U. S. 193 (1936), for example, we sustained an ad valorem tax on accounts receivable and bank deposits levied by the State in which the taxpayer maintained "the actual seat of its corporate government," id. at 298 U. S. 212, for the reason that the intangibles at issue had become " integral parts of some local business,'" id. at 298 U. S. 210 (quoting Farmers Loan & Trust Co. v. Minnesota, 280 U. S. 204, 280 U. S. 213 (1930)). Thus, other than the arbitrary fiction that intangible property is "located" at the domicile of its owner, the underlying jurisdictional basis for taxation at the commercial domicile is grounded in the fact that intangibles are an "integral part" of the business. This justification supports the principle of apportionment, rather than allocation solely to the single domiciliary State. After all, if intangibles are an "integral part" of the unitary business in the domiciliary State, they also are related to the business of the corporation elsewhere. It hardly makes sense to allocate income to the commercial domicile on the theory that business activity at the commercial domicile promotes the unitary business everywhere, and then to ignore those connections and to disregard the claims of the other States in which the unitary business operates. See Dexter, Taxation of Income from Intangibles of Multistate-Multinational Corporations, 29 Vand.L.Rev. 401, 416 (1976).
In short, unless the Court is prepared to abandon the unitary business principle as applied to investment income and to read into the Constitution the arbitrary legal fiction that intangibles are situated at the domicile of their owner, the Court will be unable to sustain a domiciliary State's allocation of all passive investment income to itself against due process attack.
We thus arrive at the only remaining possibility. The Court's holding today, taken with past decisions, may imply that ASARCO's investments must be treated as though ASARCO were not only running its nonferrous metals business, but also running, as another, separate business, a sort of mutual fund or holding company specializing in the worldwide nonferrous metals industry. The income from this fictitious separate business would then be taxable on an apportioned basis by those States in which the business was carried out, just as ASARCO's unitary nonferrous metals business could be taxed on an apportioned basis by those States in which that business is conducted.
If so, the Constitution apparently requires that a very small tail be permitted to wag a very big dog. For in the case of companies like ASARCO, with tens or hundreds of millions of dollars of dividend income generated by a handful of long-term investments, vast differences in state revenues may turn on whether the quarterly dividend checks sent from "passive" subsidiaries are sent to a clerk in a company office in one State, rather than another. Surely it is highly anomalous that the Due Process Clause should require the dividend income of a far-flung interstate business selectively to be attributed solely to the State or two in which a few minimal securities management functions are carried out, rather than apportioned among all the States whose "civilized society" has made the income-generating wealth of the larger enterprise possible.
Moreover, if such a requirement were judicially imposed, it would create potentially staggering practical difficulties for taxpayers, state tax administrators, and, ultimately, the courts. For despite the Court's easy conclusion today that ASARCO's supposedly discrete investment business is distinct from ASARCO's operational nonferrous metals business, it is unlikely in practice that the two could be so readily disentangled. Imagine, for example, that the dividend checks were received and the management decisions regarding ASARCO's investments were made at ASARCO's corporate headquarters in one State, while the expertise and information relied on to make those decisions were drawn from corporate sources in many States. In apportioning the income of this purportedly separate investment business among the States, the question inescapably would arise as to what limits the Constitution places on how little of the taxable values at ASARCO's headquarters the expertiseand information-producing States could allocate to ASARCO's investment business, as opposed to the theoretically distinct operational nonferrous metals business. Stating the question suffices to show that it reintroduces just the sort of insoluble problem of dividing businesses that the unitary business principle was designed to avoid. Thus, if the Court does not abandon the separate business theory that it endorses today, it merely will have substituted the vexing constitutional problem of how to apportion businesses for today's problem of how to apportion taxes.
In sum, the Court has erred. Without a well-founded constitutional mandate, it has straitjacketed the States' ability to develop fair systems of apportionment, prematurely ending the evolutionary process begun by the Uniform Division of Income for Tax Purposes Act and the Multistate Tax Commission. By limiting the apportionment concept by restrictions not found anywhere in the Constitution, moreover, the Court has committed itself to a path leading to more constitutional problems and greater involvement by this Court in the intricacies of interstate taxation.
The Court's error, moreover, is compounded by its decision to invoke the Due Process Clause as the source of its authority, despite the ready availability of the Commerce Clause. [ Footnote 2/14 ] For unlike a Commerce Clause ruling which is susceptible to repair by Congress, today's due process decision may be beyond Congress' power to correct.
This constitutional shortsightedness overlooks the fact that Congress, not this Court, holds the ultimate responsibility for maintaining a healthy system of interstate commerce. Moreover, it is Congress, not this Court, which has the institutional tools to deal with these complex problems. Congress itself is only too aware of the limitations under which the judiciary operates when it attempts to deal with the knotty problems of state taxation of multistate enterprises within a federal system. As the Special Subcommittee on State Taxation of the Committee on the Judiciary of the House of Representatives bluntly put it:
[T]he courts have over the years attempted to resolve the numerous and complex problems [of state taxation of interstate commerce] brought before them.... [T]heir decisions on State taxation leave much to be desired, both in individual cases and as a body of law. The reason for this inadequacy is completely unrelated to the ability or diligence of a particular court or of any particular judge. The inadequacy is entirely institutional. The problem arises from the fact that a court deals in absolutes, and, in this area, an absolute decision in either direction is not likely to be satisfactory.... [T]he court is substantially handicapped by its inability to explore fully the nature, the extent, and the impact of the burdens created [by state taxes].
"The inherent inadequacy of the judicial process to achieve a full accommodation of the competing demands of the States for taxes and of the national interest in unhindered commerce is perhaps nowhere more clear than in the apportionment of income for tax purposes.... In the typical case of this kind, the tax of only one of the States would be before the court.... The court has only the records of the cases before it, with only such information as may be necessary to state the facts and consequences in those cases. On this basis, is the court in a position to choose between [competing approaches], striking down all formulas containing one or the other? If so, what standard should it use in deciding which one? Given the adversary system of litigation, how does the court obtain the necessary data on economic burdens and revenue consequences?... " "Difficulties also arise from the limitations of the judicial process in prescribing what constitutes adequate jurisdiction to tax. As a question of due process, the court can do no more than decide on conceptual grounds... whether the quality of the relationship in the case before it is sufficient to sustain the imposition of the tax...."
... It is no better suited to devise and prescribe general rules setting the optimum level of jurisdiction than it is to impose a uniform apportionment formula. For example, the judicial process does not lend itself to a determination of what level of nexus would strike the most equitable balance between the demands of the States for revenue and the probable burdens of compliance.
H.R.Rep. No. 1480, 88th Cong., 2d Sess., 11-12 (1964).
Nor is Congress alone in recognizing the limitations of the judiciary in this field. Many Justices of this Court have acknowledged "the weakness of the judicial process in these tax questions where the total problem... reaches us only in installments." Northwest Airlines, Inc. v. Minnesota, 322 U. S. 292, 322 U. S. 307 (1944) (Jackson, J., concurring). The Court itself has said:
To introduce a new doctrine of tax apportionment... is not merely to indulge in constitutional innovation. It is to introduce practical dislocation into the established taxing systems of the States.... [C]ertainly we ought not to embarrass the future by judicial answers which, at best, can deal only in a truncated way with problems sufficiently difficult even for legislative statesmanship.
Id. at 322 U. S. 299 -300 (opinion of the Court). Surely in a case such as the one before us, Congress, unconfined by "the narrow scope of judicial proceedings," Pennsylvania v. Wheeling & Belmont Bridge Co., 13 How. 518, 54 U. S. 592 (1852) (Taney, C.J., dissenting), is in a better position,
in the exercise of its plenary constitutional control over interstate commerce, not only [to] consider whether such a tax as now under scrutiny is consistent with the best interests of our national economy, but... also, on the basis of full exploration of the many aspects of a complicated problem, [to] devise a national policy fair alike to the States and our Union.
McCarroll v. Dixie Greyhound Lines, Inc., 309 U. S. 176, 309 U. S. 189 (1940) (Black, J., dissenting). But it is just this sort of congressional action which today's due process decision appears to preclude. This Court should not so confidently preempt the Congress.
In sum, the Court has focused its attention solely on the question whether ASARCO's interests in its subsidiaries represented active investments, and concludes they did not. The Court then permits this initial erroneous result to derail its analysis. Instead of continuing, the Court fails to consider the possibility that ASARCO's investment decisionmaking was not segregated from its operational nonferrous metals business; fails to consider the possibility that ASARCO's investments were simply an interim use of long-term funds accumulated for ultimate use elsewhere in the business; fails to consider the possibility that ruling out apportioned taxation of income earned from intangibles may imply that such income is "nowhere income"; fails to consider the possibility that its ruling may be inconsistent with the unitary business principle because it suggests that income from intangibles may be taxed only by a domiciliary State; and fails to consider the possibility that it may be as difficult to apportion a business as to apportion income for constitutional purposes. Finally, and most distressingly, the Court fails to consider its own limitations and Congress' constitutional prerogatives. Had the Court given the intricate questions presented by this case the attention they deserve, it might have reached a different result. I respectfully dissent.
[ Footnote 2/1 ]
For example, if the expenses incurred by a vertically integrated business in manufacturing a product in State A are deducted from the revenues generated by marketing the product in State B, the resulting net income cannot reasonably be allocated either entirely to State A or entirely to State B. See Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, 254 U. S. 120 -121 (1920). Even when state-by-state allocation superficially seems feasible, as in the case of a horizontally integrated but loosely knit chain of retail stores, "economies of scale" resulting from "functional integration" and "centralization of management," Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U. S. 425, 445 U. S. 438 (1980), may augment the net income earned by the whole to a value greater than the sum of what could be earned by each of the parts operating separately. See Butler Bros. v. McColgan, 315 U. S. 501, 315 U. S. 508 -509 (1942). When this happens, the additional increment in income resulting from the combination cannot be allocated to any single one of the parts on other than an arbitrary basis. See, e.g., Adams Express Co. v. Ohio State Auditor, 165 U. S. 194, 165 U. S. 221 (1897) (a unitary enterprise has a "value resulting from the combination of the means by which the business [is] carried on [which] exist[s]... throughout the entire domain of [its] operation"). The net income of an organic, unitary business, in short, is indivisible.
[ Footnote 2/2 ]
Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, at 445 U. S. 439.
[ Footnote 2/3 ]
Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U. S. 207, 447 U. S. 224 (1980).
[ Footnote 2/4 ]
Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, at 445 U. S. 442.
[ Footnote 2/5 ]
ASARCO states that it
has not contested Idaho's right to treat interest income from temporary deposits of [its] working capital funds as apportionable business income derived in the ordinary course of [its] Unitary Business activities.
Brief for Appellant 26. See also Tr. of Oral Arg. 6-7.
[ Footnote 2/6 ]
This process is analogous to the leasing of idle physical assets until they are needed in the business. By analogy to ASARCO's investment of its working capital in short-term securities, for example, a company might lease time on one of its computers to outsiders on an hourly basis in order to keep the computer fully occupied during slack periods. Similarly, in analogy to the interim investment of retained earnings, a company might lease for a term of years the areas of its office buildings into which it intends ultimately to expand. It could hardly be claimed that, by so doing, the company had opened up a separate and unrelated leasing business. To the contrary, the income from such leases would be functionally related to the company's unitary business, and, therefore, taxable on an apportioned basis by a State in which the company did business. Accordingly, it is hard to see why a company that rents out idle money, rather than idle physical assets, should be treated differently under the Due Process Clause, and harder still to see why the Constitution would treat short-term investments of working capital differently than longer-term investments of retained earnings.
[ Footnote 2/7 ]
Of course, had ASARCO attempted to do so, it might have been able to make such a showing. ASARCO did argue, and the trial court found, that it had
never been required to utilize its stock as security for borrowing of working capital, acquiring stock or securities in other companies or to support any bond issues.
[ Footnote 2/8 ]
Under the management agreement between ASARCO and the other three shareholders of Southern Peru, ASARCO has the right to appoint 6 of the company's 13 directors, the other three shareholders together have the right to appoint another 6, and the 13th and final director is appointed by the first 12 directors or by joint action of all the shareholders. Southern Peru's bylaws, which can be changed only by unanimous consent, provide that eight votes are needed to pass any resolution. App. to Juris.Statement 55a; App. 121a.
[ Footnote 2/9 ]
ASARCO also dominated Revere Copper and General Cable. While ASARCO owned only 34% interests in each company, the remaining shares of each were "widely held," ante at 458 U. S. 324, so that ordinarily ASARCO would be assured control of each company, and almost never face effective opposition to its wishes.
Prior to the tax years in question, however, the Justice Department brought an antitrust suit against ASARCO related to its holdings in General Cable and Revere Copper. The suit culminated in a consent decree issued in 1967 forbidding ASARCO to sell to General Cable and Revere Copper at prices lower than ASARCO sold to other customers, and preventing ASARCO from voting its stock in either company. In 1970, the last of the three tax years at issue here, the decree was modified and "ASARCO was compelled... to divest itself of all its General Cable stock." Ante at 458 U. S. 324, n. 20.
ASARCO argues that the 1967 consent decree, which was issued before the tax years of concern here, prevented General Cable and Revere Copper from being a part of ASARCO's unitary business. To the contrary, however, the antitrust suit and consent decree strongly suggest that General Cable and Revere Copper were entangled in ASARCO's unitary business, perhaps unlawfully so. On the present record, ASARCO has not borne the burden of showing that the 1967 decree severed enough of the connections between ASARCO and the two subsidiaries to transform ASARCO's holdings from active components of its unitary business to passive investments. At least with respect to General Cable, the modification in 1970 (the last tax year in issue here) of the consent decree so that ASARCO was required to sell its holdings in the company indicates the contrary, since divestiture would scarcely be necessary if the business of the two companies had been unrelated. Moreover, the mere fact that ASARCO traded with General Cable and Revere Copper at market rates does not compel the conclusion that ASARCO's investments in those companies were part of its unitary business. In Exxon, for example, we concluded that the fact that "wholesale market values" were assigned "to interdepartmental transfers of products and supplies," 447 U.S. at 447 U. S. 225, did not undermine the unitary nature of Exxon's business.
Although I believe that ASARCO's showing was insufficient to establish that General Cable and Revere Copper were not under its control for purposes of determining the constitutional limits of Idaho's taxation, for simplicity in what follows, I assume only that ASARCO was a major investor in these two subsidiaries.
[ Footnote 2/10 ]
Just as inexplicably, the Court reverses Idaho's apportioned tax on ASARCO's dividend income from its 34% interests in Revere Copper & Brass and in General Cable Corp., companies that were "major customers" of ASARCO buying tens of millions of dollars of goods from ASARCO each year.
[ Footnote 2/11 ]
The Court suggests that my "perception of some of the facts" necessary to reach this conclusion "differs substantially from the record." Ante at 458 U. S. 325, n. 21. In fact, however, my view of the facts differs from neither the record nor, I think, that of the Court. As should be apparent, my disagreement with the Court is based not on the facts, but on the constitutional significance to be given those facts.
[ Footnote 2/12 ]
The Court is careful not to extend the reach of its holding to domiciliary States. It states the question presented as
whether the State of Idaho constitutionally may include within the taxable income of a non domiciliary parent corporation... a portion of intangible income... that the parent receives from subsidiary corporations having no other connection with the State.
Ante at 458 U. S. 308 -309 (emphasis added). As its holding, the Court asserts that it
cannot accept... a definition of 'unitary business' that would permit non domiciliary States to apportion and tax dividends '[w]here the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State....'
Ante at 458 U. S. 327 (citation omitted, emphasis added).
[ Footnote 2/13 ]
See Dexter, Taxation of Income from Intangibles of Multistate-Multinational Corporations, 29 Vand.L.Rev. 401, 403 (1976).
[ Footnote 2/14 ]
This Court's authority to invalidate state legislation because it interferes with interstate commerce is inferred from the Constitution's grant to Congress of the authority to regulate interstate commerce. Art. I, § 8, Cl. 3. For this reason, Congress may "confe[r] upon the States an ability to restrict the flow of interstate commerce that they would not otherwise enjoy." Lewis v. BT Investment Managers, Inc., 447 U. S. 27, 447 U. S. 44 (1980) (citations omitted). Consistent with this principle, it has long been established that Congress generally has the power to "overrule" a decision of this Court invalidating state legislation on Commerce Clause grounds. Compare Leisy v. Hardin, 135 U. S. 100 (1890), with In re Rahrer, 140 U. S. 545 (1891). By contrast, Congress generally cannot waive a ruling of this Court decided under the Due Process Clause. Accordingly, this Court's "threshold" for invalidating state legislation should be considerably higher under the Due Process Clause than under the Commerce Clause.
In the present case, the Court could have reached its result by relying on the Commerce Clause. Our cases establish that analysis of the validity of state taxation under the Commerce Clause is similar to analysis under the Due Process Clause. The test under the Commerce Clause is whether the tax
'is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State.'
Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. at 445 U. S. 443 (quoting Complete Auto Transit, Inc. v. Brady, 430 U. S. 274, 430 U. S. 279 (1977)). In his dissent in Mobil Oil, JUSTICE STEVENS explained how a violation of the Due Process Clause could also be a violation of the Commerce Clause:
[I]f, in a particular case, use of an allocation formula has the effect of taxing income earned by an interstate entity outside the State, it could alternatively be said to have the effect of taxing the income earned by that entity inside the State at a rate higher than that used for a comparable, wholly intrastate business, a discrimination that violates the Commerce Clause.
445 U.S. at 445 U. S. 452, n. 4.
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