Appendix — Container Corp. of America v. Franchise Tax Bd.

Appendix A

In the Court of Appeal

of the

State of California

First Appellate District

Division Four

1/Civil 48990

(Superior Ct. No. 673-492)

Certified for Publication

Container Corporation of America,

Plaintiff and Appellant,

vs.

Franchise Tax Board,

Defendant and Respondent.

[Filed April 14, 1981]

Container Corporation of America appeals from a judg-

ment denying partial refund of corporation franchise taxes

paid for the income years 1963, 1964 and 1965. We affirm

the judgment.

The question is whether, under stipulated facts, appel-

lant was properly treated as deriving income from sources

both within and outside California (Rev. & Tax. Code,

§ 25101) on the basis that appellant and its foreign sub-

sidiaries constituted a unitary enterprise.

"Revenue and Taxation Code section 25101 for the period in

question provided in part: “When the income of a taxpayer subject

A-2

Appellant, a Delaware corporation headquartered in

Chicago, is engaged in the production and distribution of

paperboard packaging materials. Appellant is subject to

corporation franchise taxes on its activities in California.

During the disputed tax years, appellant controlled 20

subsidiaries in Western Europe and Latin America. All

these subsidiaries except one were engaged in the paper-

board packaging business.

Appellant has assigned responsibility for its United

States operations to regional vice-presidents, each respon-

sible for corporate operations in his area. This same policy

of decentralization was followed in setting up the foreign

subsidiaries. Appellant’s first foreign operation was es-

tablished in Colombia in 1944. The Colombian group di-

rected legal work, selected and trained personnel, and pro-

moted local sales; the parent corporation managed the

technical and financial aspects of the business and supplied

some equipment and raw materials. All the foreign sub-

sidiaries were managed predominantly by local citizens.

Self-reliance by the subsidiaries was encouraged.

During the years in question, 38 of appellant’s approxi-

mately 13,400 employees were assigned to foreign sub-

A-3

sidiaries; some other employees of appellant were trans-

ferred to foreign subsidiaries and were no longer on

appellant’s payroll. Appellant had no special aim of

transferring employees to the foreign subsidiaries. Such

transfers generally responded to a specific need of a subsid-

iary. If the subsidiary requested assistance from appellant

in finding a person with particular qualifications, appellant

might suggest one of its own employees. Employees trans-

ferred to foreign subsidiaries usually continued to draw

some pay from appellant, and fringe benefits except par-

ticipation in appellant’s stock bonus plan were continued

even after transfer. Language and cultural differences,

and a perceived need to present an acceptable local image,

did substantially inhibit transfer of employees from the

parent corporation to the foreign subsidiaries.

Only three of appellant’s executives dealt regularly with

the foreign subsidiaries. Local employees were in day-to-

day control, but all important moves of the subsidiaries

were subject to review by appellant’s management. Appel-

lant and its foreign subsidiaries usually reached decisions

by mutual consent, but appe!'ant held local management re-

sponsible for the performance of foreign subsidiaries. Ap-

pellant was represented on the board of directors of most

of the subsidiaries.

There was no regular program for training in the United

States of employees of foreign subsidiaries. But 10 or 12

times a year a foreign employee came to the United States

for several weeks to learn appellant’s operations. The for-

eign subsidiaries paid the cost of these visits.

A-4

Appellant made loans to its subsidiaries totaling

$7,704,987, $7,155,714 and $3,223,371, for the three disputed

years. The subsidiaries also borrowed from local sources;

appellant guaranteed approximately one-third of these

loans.

The foreign subsidiaries’ budgets were regularly sent to

appellant for its information but specific approval was not

required. Current financial data were furnished to appel-

lant each month. The foreign subsidiaries provided appel-

lant with a more detailed financial statement at the end of

each year. Although appellant’s management thus kept in-

formed of operations of the foreign subsidiaries, most fi-

nancial decisions were made by the management of the

individual companies.

All the foreign subsidiaries except those in the Nether-

lands and Germany were audited by the accounting firm

which appellant used for its own audits. On the other hand,

tax returns to foreign governments were locally prepared.

These returns reported only the revenue produced and

costs incurred by the subsidiary in the taxing jurisdiction.

Each subsidiary used local law firms.

Appellant purchased no raw materials or finished prod-

ucts from its subsidiaries and did not engage in joint mar-

keting efforts with them. Appellant sold paperboard and

raw materials in small amounts to the foreign subsidiaries;

those materials could have been obtained from other

sources. Appellant also purchased paper products from out-

side parties, for the benefit of the foreign subsidiaries. Ap-

pellant entered into technical service agreements with some

subsidiaries and provided such services for other subsidi-

A-5

aries under informal arrangements. Appellant did not

cooperate so extensively with any nonaffiliated companies.

Occasionally, appellant assisted subsidiaries in the ac-

quisition of equipment and machinery. Some of the equip-

ment was purchased directly from appellant. Appellant

also sometimes acted as a sales broker for the foreign

subsidiaries. Although this function could have been per-

formed by independent brokers, the commissions charged

by the latter would probably be higher than the charge

appellant made for the same services.

Appellant contends that its California and out-of-state

operations do not comprise a unitary enterprise to which

respondent board may properly apply its formula for ap-

portionment of income. Constitutional principles prohibit

taxation in the absence of a link between the property to be

taxed and the taxing entity. (See Mobil Oil Corp. v. Com-

missioner of Taxes (1980) 445 U.S. 425, 436-437; Miller

Bros. Co. v. Maryland (1954) 347 U.S. 340, 344-345.) Ap-

pellant maintains that the “unitary method of ownership,

use and operation of the business of the parent and its

subsidiaries” was not established here. (See Edison Cali-

fornia Stores v. McColgan (1947) 30 Cal.2d 472, 482.)

Because the parties submitted the case to the trial court

on a stipulation, the case presents no conflicting evidence.

Therefore, this court is not constrained by the substantial

evidence rule. The trial court’s findings are not binding on

us and we must make our own determination of the ques-

tions of law presented by the stipuleted fucts. (Rice Grow-

ers’ Association of California v. County of Yolo (1971) 17

Cal.App.3d 227, 230, cert. den. 404 U.S. 941; Dealers In-

A-6

stallation Service, Inc. v. State Bd. of Equal. (1970) 13

Cal. App.3d 395, 399; Chase Brass & Copper Co. v. Fran-

chise Tax Bd. (1970) 10 Cal.App.3d 496, 502, cert. den. 400

U.S. 961; Standard Register Co. v. Franchise Tax Board

(1968) 259 Cal.App.2d 125, 129-130.)

A corporate taxpayer’s income must be subjected to

apportionment* when it “is derived from or attributable to

sources both within and without the State.” (Rev. & Tax.

Code, § 25101, set out in fn. 1, ante; Honolulu Oil Corp. v.

Franchise Tax Bd. (1963) 60 Cal.2d 417, 425; Superior Oil

Co. v. Franchise Tax Bd. (1963) 60 Cal.2d 406, 417.) “[T]Jhe

linchpin of apportionability in the field of state income

taxation is a unitary-business principle.” (Mobi Oil Corp.

v. Commissioner of Taxes, supra, 445 U.S. 425, 439.) The

fairness of allocating to California a just proportion of the

profits earned from a unitary business’ is settled. (See

The California method of apportionment is explained in Keesling

and Warren, The Unitary Concept in the Allocation of Income

(1960) 12 Hastings L.J. 42, 43: “Under the formula method the

business activities within the state are considered to be an insep-

arable part of a business carried on both within and without the

state. The total gross income from the entire business is determined.

The allowable deductions are then subtracted and the remaining

net income is apportioned within and without the state by means

of an allocation formula consisting of various factors which are

thought to be relevant in the production of income, such as prop-

erty, payroll, and sales.”

*Keesling and Warren also discuss the unitary treatment of multi-

corporate enterprises (op. cit. supra, 12 Hastings Law Journal 42,

57): “In any case where a business would be considered unitary if

conducted by one taxpayer, it should likewise be so considered

A-7

Butler Bros. v. McColgan (1942) 315 U.S. 501, 509; El

Dorado Ot Works v. McCoigan (1950) 34 Cal.2d 731, 738,

app. dism., 340 U.S. 801; Edison California Stores v. Mc-

Colgan (1947) 30 Cal.2d 472, 478; Butler Bros. v. McColgan

(1941) 17 Cal.2d 664, 677-678, aff'd in 315 U.S. 501;

Handlery v. Franchise Tax Bd., supra, 26 Cal.App.3d 970,

974.)

The propriety of applying the unitary concept in taxing

foreign corporations was established in Butler Bros. v.

McColgan, supra, 17 Cal.2d 664. The court there noted that

only in circumstances where the corporation’s California

business is “truly separate and distinct from its business

without this state, so that the segregation of income may be

made clearly and accurately, that the separate accounting

method may properly be used.” (/d., at pp. 667-668.) The

court set out a three-part test to determine the unitary

nature of a taxpayer’s business: “(1) unity of ownership;

(2) unity of operation as evidenced by central purchasing,

accounting and management divisions; and (3) unity of

ducted within the state, so in the case of a group of affiliated cor-

porations engaged in the conduct of a business, it may look at the

total income of the group to determine the amount of income

attributable to the portion of the business conducted within the

state by one or more of the members of the group.”

The fairness of the formula apportionment method is explained

as follows: “[T]he ‘formula’ apportionment of unitary business in-

come has not only been found to be constitutionally permissible,

but . . . it is often the only reasonable and practical manner in

which a state may levy and collect taxes to which it is constitu-

tionally entitled. It might be described as a sort of rule of neces-

sity, having its origin in the accommodation of a state’s constitu-

tional right to tax income derived from within the state, to

constitutional due process of law and interstate commerce provi-

sions.” (Handlery v. Franchise Tax Bd. (1972) 26 Cal.App.3d

970, 974.)

A-8

use in its centralized executive force and general system of

operation.” (Jd., at p. 678; see Honolulu Oil Corp. v. Fran-

chise Tax Bd., supra, 60 Cal.2d 417, 423; Superior Oil Co.

v. Franchise Tax Bd., supra, 60 Cal.2d 406, 412; John Deere

Plow Co. v. Franchise Tax Bd. (1951) 38 Cal.2d 214, 229,

app. dism., 343 U.S. 939; Edison California Stores v. Mc-

Colgan, supra, 30 Cal.2d 472, 478; Chase Brass & Copper

Co. v. Franchise Tax Bd., supra, 10 Cal.App.3d 496, 502;

Standard Register Co. v. Franchise Tax Board, supra, 259

Cal.App.2d 125, 129.)

The first element, unity of ownership, is present here:

the parent corporation owned the foreign subsidiaries.

However, unity of ownership does not render a business

unitary if the other two requirements are not met. (See

Chase Brass & Copper Co. v. Franchise Tax Bd., supra,

10 Cal.App.3d 496, 502.)

Unity of operation and unity of use are concepts that

may to some degree overlap, but generally functions that

in administrative theory are labeled “staff” fall within the

“operation” category and “line” functions fall within the

“use” category. (See Chase Brass & Copper Co. v. Fran-

chise Tax Bd., supra, 10 Cal.App.3d 496, 502.) Determining

the presence of unity between the parent corporation and

_ the foreign subsidiaries in the area of operations is guided

by various factors; no one element controls the decision.

Although appellant bought no raw materials or finished

products from its subsidiaries, appellant did sometimes sell

small quantities of paperboard and raw materials to its

subsidiaries. The subsidiaries could have obtained those

materials from other sources at the same price appellant

A-9

charged, but the access to materials stocked by the parent

is of some relevance. (See Chase Brass € Copper Co. v.

Franchise Tax Bd., supra, 10 Cal.App.3d 496, 503.)

Appellant sold some of its used equipment to its sub-

sidiaries during the period in question. Appellant also as-

sisted its subsidiaries in the acquisition of equipment and

machinery. Appellant sometimes contacted a subsidiary

when considering disposition of a piece of equipment in

good operating order that might assist in the subsidiary’s

operation.

Appellant assisted its subsidiaries in procuring paper,

personnel and equipment. Appellant purchased some paper

from third parties in order to convey such goods to its

foreign subsidiaries. If a subsidiary was unable to fill an

important vacancy, it would request assistance from ap-

pellant in locating an individual with the proper qualifi-

cations. Appellant generally looked within its own ranks

for such a person. Appellant’s purchasing department

played a part in procuring equipment from independent

suppliers for the benefit of its subsidiaries. These purchas-

ing and brokerage ties between parent and subsidiary are

of some relevance. (See Chase Brass & Copper Co. v. Fran-

chise Tax Bd., swpra, 10 Cal.App.3d 496, 503.)

Although appellant and all but two of its foreign sub-

sidiaries kept separate books of account, all the foreign

operations were audited by the same accounting firm that

audited appellant’s books. A format developed by appellant

for the transmission of monthly and quarterly financial re- _

ports was used by the subsidiaries.

A-10

Appellant loaned to its subsidiaries over $18,000,000

during the period in question. Appellant aiso guaranteed

approximately one-third of the subsidiaries’ other loans.

Although the subsidiaries may have been able to obtain

credit from-other sources, the loans serve as “substantial

evidence of unity of operation.” (Chase Brass & Copper

Co. v. Franchise Tax Bd., supra, 10 Cal.App.3d 496, 503.)

The fact that the subsidiaries could readily turn to ap-

pellant for financial assistances points toward unity. (/d.)

So does the foreign subsidiaries’ ability to utilize appellant

as a guarantor of its loans. “It must have been deemed ad-

vantageous to the over-all management to have handled

the transaction in this way, otherwise a separate arrange-

ment would have been made.” (Chase Brass € Copper Co.

v. Franchise Tax Bd., supra, 10 Cal.App.3d 496, 503.)

Although there were no common employee benefit plans,

some employees of the subsidiaries remained on appellant’s

payroll. Employees of appellant who transferred to the

foreign subsidiaries were allowed to continne their em-

ployee benefits, and seven such employees were given op-

tions to purchase appellant’s stock.

There was considerable interplay between appellant and

its foreign subsidiaries in the area of corporate expansion.

Although there was no continued effort by appellant to

solicit business for its foreign subsidiaries, on at least one

occasion appellant assisted in the negotiation of a contract

for a foreign subsidiary.

The third element, unity ‘of use, relates to executive

forces and operational systems. (Superior Oil Co. v. Fran-

chise Tax Bd., supra, 60 Cal.2d 406, 415; Chase Brass &

A-1l1

Copper Co. v. Franchise Tax Bd., supra, 10 Cal.App.3d

496, 504.) Appeilant contends that the absence of a steady

fiow of raw materials and manufactured goods between the

parent corporation and its subsidiaries compels a conclu-

sion that unity cf use is lacking. But the California Su-

preme Court has twice held an operation to be unitary

though there was no substantial flow of goods between cor-

porate entities. (See Honolulu Oil Corp. v. Franchise Tax

Bd., supra, 60 Cal.2d 417; Superior Oil Co. v. Franchise

Tax Bd., supra, 60 Cal.2d 406.) In Superior Oil, supra, the

Supreme Court declared that “[n]Jone of the three unities

. . necessarily require the interstate movement of prod-

ucts.” (Jd., at p. 415.) In Honolulu Oil, supra, the court

rejected a contention that control by central management

and centralized performance of service functions are in-

sufficient alone to support a conclusion of a unitary opera-

tion( id., at p. 423), and determined that “the mere fact

that production and sale . . . are a local operation does not

transform that operation to something distinct and apart.”

(Id., at p. 424.)

Citing Chase Brass & Copper Co. v. Franchise Tax Bd.,

supra, 10 Cal.App.3d 496, appellant argues that Honolulu

Oil and Superior Oil are not applicable outside the special

facts presented in those cases. In Chase Brass this court

held that a California subsidiary was not unitary with that

part of its parent’s operation which dealt with materials

not being purchased by the subsidiary. (/d., at p. 506.) But

the decision does not depart from the earlier and binding

holdings in Honolulu Oil and Superior Oil, supra. The ties

which existed between the parent and subsidiary in areas

beyond the subsidiary’s normal business activities appear

A-12

to have been too tenuous to be given weight. Furthermore,

the court noted that “(t]he fact of the sales alone .. . does

not determine the business to be unitary.” (/d., at p. 506.)

Appellant’s contention that a substantial flow of goods is

essential to the existence of a unitary manufacturing or

mercantile business must be rejected. Product flow is im-

portant but it is only one of several factors to be evaluated

in determining whether a business is unitary.

Appellant complains that the imposition of the unitary

apportionment system severely misallocates to California,

income from foreign sources. Appellant suggests that to

avoid such a result substantial flow of goods between the

parent and the subsidiary should be prerequisite to a de-

termination of unitary status. But the adoption of a dif-

ferent formula than the one presently in effect is a legisla-

tive matter.

Because a substantial flow of goods between the parent

and its subsidiaries is not requisite to unitary status, the

operational interrelationship of the corporate entities must

be evaluated. The integration of major executive functions

is a factor of great importance pointing toward unity. (See

Chase Brass & Copper Co. v. Franchise Tax Bd., supra,

10 Cal. App.3d 496, 504.) Although the everyday operations

of the subsidiaries were handled by local employees, major

policy decisions of the subsidiaries were subject to review

by appellant. she ‘major policy matters’ are what count

in our estimation of integration.” (Chase Brass & Copper

Co. v. Franchise Tax Bd., supra, 10 Cal.App.3d 496, 504.)

High officials of appellant gave directions to subsidiaries

for compliance with the parent’s standard of professional-

A-13

ism, profitability and ethical practices. Appellant con-

stantly reviewed the financial reports of its subsidiaries;

if these reports had not given sufficient information of a

subsidiary’s condition, appellant would have intervened.

The submission of financial reports on a monthly basis

from the subsidiary to the parent corporation is of some

significance. (See Standard Register Co. v. Franchise Tax

Board, supra, 259 Cal.App.2d 125, 136.) Appellant’s offi-

cials served on the boards of directors of most of the sub-

sidiaries. Thus, control on the highest level was exerted by

appellant. Appellant also employed a “foreign operations

staff” to oversee the subsidiaries, to prepare studies re-

garding the subsidiaries’ activities and to give directions

to the management of the subsidiaries.

Appellant’s policy of regional decentralization was fol-

lowed by the subsidiaries. The parent corporation was

involved with the training of local nationals for manage-

ment positions. Appellant provided important personnel,

equipment and financing to assist its first foreign subsidi-

ary to enter the paperboard packaging industry. Such as-

sistance in the initial stages of operation was crucial to

the success of the subsidiary. Appellant continued to pro-

vide technical assistance to its subsidiaries. The subsidi-

aries had ready access to appellant’s expertise. The sub-

sidiaries were only charged costs and an apportionment of

overhead; in some cases the charges were not recovered.

The extent of the technical assistance provided by appel-

lant was substantial ; it included design work, sample pack-

aging, marketing research, formula methods used in

packaging and cost accounting. Appellant did not provide

extensive technical service to any nonaffiliated corporations.

A-14

The subsidiaries were prohibited from transferring infor-

mation received from appellant to third parties.

The consolidation of the domestic and overseas opera-

tions extended to a public image of unity; in its 1963 an-

nual report, appellant referred to the employees of subsidi-

aries as its own employees.

Appellant argues that the foreign subsidiaries are inde-

pendent in their management, production, and distribution.

But appellant’s organizational framework calls for de-

centralisation even in its United States operations. The

relation «niy; Setween parent and subsidiary comports with

appellant’s general philosophy of local management and

a reliance on key executives to meet corporate goals. Ap-

pellant emphasizes the lack of product flow between the

parent and the subsidiaries. But the low level of product

exchange must be considered in conjunction with the na-

ture of the business, high transportation costs and import

restrictions. All but the latter consideration apply to ap-

pellant’s United States operations. The desirability of

creating an image of a locally operated enterprise is evi-

dent. The court in Standard Register Co. v. Franchise Tax

Board, supra, 259 Cal.App.2d 125, recognized this tendency.

“At all times Pacific division attempted to create the image

of its being a California manufacturer in order to compete

in the western market which was very conscious of buying

western.” (/d., at p. 132.) The characterization by the

parent corporation of its subsidiary as an independent

entity does not compel a finding that several divisions of

a corporation are nonunitary. Here, as in Standard Regis-

ter, a study of the operations of appellant and its subsidi-

aries shows areas where the subsidiaries acted indepen-

A-15

dently of appellant. But there are other areas in which the

parent and subsidiaries contributed to each othe in unity

of use and unity of operation. (See Slandard Register Co.

v. Franchise Tax Board, supra, 259 Cal.App.2d 125, 134-

135.) Appellant’s own view of its operations as a unitary

business is evidenced by statements in the company’s an-

nual reports. Appellant identifies itself as “the world’s

largest producer of paperboard packaging,” referring to

overseas and domestic operations. Appellant also discussed

in its reports the strategic location of packaging, printing

and fabricating facilities both in the United States and

abroad. Appellant stated that “[t]he overseas cperations

of CCA continue to grow and to become a more substantial

part of the company’s strength and profitability.” Appel-

lant further projected the image of unity by referring to

its subsidiaries as overseas operations or overseas divi-

sions. Appellant’s self-image is relevant. (See Standard

Register Co. v. Franchise Tax Board, supra, 259 Cal.App.

2d 125, 135.)

The three unities are satisfied here. Although some ele-

ments which normally exist in a unitary operation, e.g., a

substantial flow of goods, are lacking, the combination of

all the factors and ties between the parent and the subsidi-

ary support respondent board’s determination that the

operation is unitary. Appellant engaged in the same busi-

ness activities as its subsidiaries. The administrative regu-

lations indicate that a strong inference of a unitary busi-

ness exists where tae taxpayer is engaged in the same type

of business.‘ This administrative construction of the Cali-

‘California Administrative Code, title 18, section 25120, sub-

division (b), provides in part: “The determination of whether the

A-16

fornia tax laws “is entitled to great weight, and the courts

generally will not depart from construction unless it is

clearly erroneous or unauthorized.” (Coca Cola Co. v. State

Bd. of Equalization (1945) 25 Cal.2d 918, 921; also see

Select Base Materials v. Board of Equal. (1959) 51 Cal.2d

640, 647; Albright v. State of California (1979) 101 Cal.

App.3d 14, 18; Cal. Correctional Officers’ Assn. v. Board

of Administration (1978) 76 Cal.App.3d 786, 793-794;

Clayton v. County of Los Angeles (1972) 26 Cal.App.3d

390, 396.) The interchange between parent and subsidiaries

in the areas of technical assistance, development and man-

agement policymaking, is significant.

The portion of appellant’s business done within the State

of California is dependent upon or contributes to the oper-

ation of the business outside the state, (Superior Oil Co.

v. Franchise Tax Bd., supra, 60 Cal.2d 406, 412; Edison

California Stores v. McColgan, supra, 30 Cal.2d 472, 481;

Chase Brass € Copper Co. v. Franchise Tax Bd., supra,

10 Cal.App.3d 496, 501.) Although in many respects the

activities of the taxpayer constitute a single trade or business or

more than one trade or business will turn on the facts of each case.

In general, the activities of the taxpayer will be considered a single

business if there is evidence to indicate that the divisions under

consideration are integrated with, dependent upon or contribute

to each other and the operations of the taxpayer as a whole. The

following factors are considered to be good indicia of a single

trade or business; and the presence of any of these factors creates

a strong presumption that the activities of the taxpayer constitute

a single trade or business:

“(1) Same type of business: A taxpayer is generally engaged

in a single trade or business when all of its. activities are in

the same general line. For example, a taxpayer which operates

a chain of retail grocery stores will almost always be engaged

in a single trade or business.”

A-17

foreign subsidiaries acted independently, the financing, gen-

eral direction and control of the subsidiaries were in the

hands of appellant. The subsidiaries were treated as over-

seas divisions of the parent corporation, bringing appel-

lant’s entire operation within the provisions of section |

25101 of the Revenue and Taxation Code and requiring ap-

plication of the formula apportionment method in deter-

mining the California taxes due from appellant.

Appellant contends that the inclusion of its foreign sub-

sidiaries in the apportionment base violates the California

taxation statute as well as the due process clause. But

Superior Oil Co. v. Franchise Tax Bd., supra, 60 Cal.2d

406, Honolulu Oil Corp. v. Franchise Tax Bd., supra, 60

Cal.2d 417, John Deere Plow Co. v. Franchise Tax Board,

supra, 38 Cal.2d 214, and Max Factor & Co. v. Franchise

Tax Bd. (1973) 35 Cal.App.3d 7, contradict appellant's ar-

gument. The court in Max Factor, supra, noted that “Ap-

pellant (Taxpayer) is a Delaware corporation doing busi-

ness in California. In the years in question, it had three

subsidiary corporations operating in foreign countries. .. .

In determining the measure of California franchise tax,

Taxpayer and its subsidiaries were properly treated as

‘engaged in a single unitary business.’ (See Rev. & Tax.

Code, §§ 25101, 25102; Edison California Stores v. Me-

Colgan, 30 Cal.2d 472, 479-480.)” (/d., at p. 9.) Appellant

relies on Chase Brass ¢ Copper Co. v. Franchise Tax Bd.,

supra, 10 Cal.App.3d 496, as indicating that foreign sub-

sidiaries should not be included in the apportionment base.

Appellant states that “it seems fair to assume that the

fact Braden was operating in a foreign country, as are the

foreign subsidiaries in this case, was an important factor

A-18

¢

in the court’s determination.” The assumption is unwar-

ranted. Although the operations of Braden Company were

excluded, so were those of Bear Creek Company, a United

States operation. (/d., at p. 506.) The court in Chase Brass

distinguished between vertical and horizontal relationships.

(See Chase Brass € Copper Oo. v. Franchise Tax Bd.,

supra, 10 Cal.App.3d 496, 502.) The taxpayer in Chase was

a California subsidiary of a United States parent corpora-

tion which also had other subsidiaries. Here, the taxpayer

is the parent corporation; the vertical ties between parent

and subsidiary are stronger than horizontal ties between

sibling subsidiaries.

The due process challenge to the inclusion of foreign

subsidiaries in the apportionment base of a state’s taxation

formula was rejected by the United States Supreme Court

in Bass, etc., Ltd. v. Tax Comm. (1924) 266 U.S. 271. The

court held that “[i]f the entire business of the corporation

is not transacted within the State, the tax is tu be based

upon the portion of such ascertained net income deter-

mined by the proportion which the aggregate value of

specified classes of the assets of the corporation within

the State bears to the aggregate value of all such classes

of assets wherever located.” (/d., at pp. 277-278.) The

apportionment method was approved because the state

meant to reach and in fact did reach only the profits

earned within the state. Here, too, the California appor-

tionment method is designed to reach profits earned within

the state by combining all of appellant’s unitary opera-

tions. The Supreme Court reiterated its basie premise in

Mobil Oil Corp. v. Commissioner of Taxes, supra, 445 U.S.

425. The taxpayer in Mobil Oil did not argue that the state’s

A-19

worldwide apportionment was inaccurate and unfair but

asserted that foreign source income was subject to differ-

ent tests. The Supreme Court in Mobil Oil stressed the

importance of the unitary business principle as a justifica-

tion for inclusion of foreign source income in a state’s

apportionment base. (/d., at p. 438.) The Supreme Court

noted the connection between due process requirements

and the determination that a business is unitary: “Where

the business activities of the . .. [subsidiaries] have noth-

ing to do with the activities of the recipient in the taxing

State, due process considerations might well preclude ap-

portionability, because there would be no underlying uni-

tary business. . . . Mobil has failed to sustain its burden

of proving any unrelated business activity on the part of

its subsidiaries and affiliates that would raise the question

of nonapportionability.” (/d., at p. 442.)

Due process demands that a minimal connection exist

between the out-of-state activities and the taxing state and

a rational relationship between income attributed to the

out-of-state and the intrastate values of the enterprise.

The tax may not be disproportionate to the business trans-

acted by appellant in the taxing state. (Exxon Corp. v.

Wisconsin Dept. of Revenue (1980) 447 U.S. 207, 219-220;

Hans Rees’ Sons v. N. Carolina (1931) 283 U.S. 123, 135.)

A sufficient nexus is established if the corporation “avails

itself of the ‘substantial privilege of carrying on business’

within the state; .. .” (Mobil Oil Corp. v. Commissioner of

Taxes, supra, 445 U.S. 425, 437; also see Exxon Corp. v.

Wisconsin Dept. of Revenue, supra, 447 U.S. 207, 220.)

A-20

Appellant asserts that the application of the apportion-

ment formula to foreign subsidiaries fails to account for

different wages, property costs and returns on sales. Appel-

lant recognizes that there are variations in wages, property

costs and returns on sales within the United States, but

argues that the wholly different nature of the elements in

foreign countries creates an unreasonable result. Variations

in profitability within the United States have not precluded

apportionment of income according to an appropriate for-

mula. (See John Deere Plow Co. v. Franchise Tax Bd.,

supra, 38 Cal.2d 214, 224-225.) Where a company is engaged

in a unitary business, a state may apply an apportionment

formula to the taxpayer’s total income to arrive at a rough

approximation of the corporate income attribvtable to

activities within the state. (Exxon Corp. v. Wisconsin Dept.

of Revenue, supra, 447 U.S. 207, 223; Moorman Mfg. Co.

v. Bair (1978) 437 U.S. 267, 273.) There is no necessity for

a substantial flow of goods between the parent and the

subsidiary corporation. Although appellant may treat its

foreign operations as independent, the business activities

of the subsidiaries benefit substantially from “an umbrella

of centralized management and controlled interaction.”

(Exxon Corp. v. Wisconsin Dept. of Revenue, supra, 447

U.S. 207, 224.)

Appellant points out that for its own purposes income

derived from appellant’s United States operations is sepa-

rately accounted for. But a taxpayer’s internal accounting

methods are not binding on the taxing authorities. ( Exxon

Corp. v. Wisconsin Dept. of Revenue, supra, 447 U.S. 207,

224: see Butler Bros. v. McColgan, supra, 315 U.S. 501.

507-508.)

A-21

Appellant points to each of the factors used in the for-

mula apportionment in California—wages, property and

sales—and emphasizes the major differences between

wage rates in the United States and those in other coun-

tries. Appellant asserts that this wage differential is not

offset by a higher level of productivity. But such variations

in wages also exist in the United States, and do not pre-

clude unitary treatment.

Respondent may constitu ionally apply its apportionment

formula to appellant’s total income in order to establish

tax liability. Appellant had the “distinct burden of showing

by ‘clear and cogent evidence’ that it results in extraterri-

torial values being taxed.” (Butler Bros. v. McColgan,

supra, 315 U.S. 501, 507: N. @ W. Ry. Co. v. No. Carolina

(1936) 297 U.S 682, 688.) Appellant’s accounting evidence

does not meet that burden. The fairness of applying the

formula apportionment method must be evaluated in prac-

tical terms. A state’s attempt to impose an accounting

method in order to determine its proper share of the burden

of taxation is “faced with the impossibility of allocating

specifically the profits earned by the processes conducted

within its borders.” (Underwood T’ Writer Co. v. Chamber-

lain (1920) 254 U.S. 113, 121; also see Exron Corp. v.

Wisconsin Dept. of Revenue, supra, 447 U.S. 207, 224.)

California’s apportionment is not so burdensome as to

violate due process.

Appellant urges that its statistical evidence shows that

the application of the apportionment formula yields a

distorted result. The United States Supreme Court in

Norfolk € W. R. Co. v. Tax Comm'n. (1968) 390 U.S. 317,

wt

A-22

329, held that “when a taxpayer comes forward with strong

evidence tending to prove that the . . . formula will yield a

grossly distorted result in its particular case, the State is

obliged to counter that evidence or to make the accommo-

dations necessary to assure that its taxing power is con-

fined to its constitutional limits. If it fails to do so and

if ... the taxpayer has . . . show[n] that the tax is so

excessive as to burden interstate commerce, the taxpayer

must prevail.” The evidence appellant presented with re-

spect to the disproportionality of income allocation is not

compelling. It fails to account for contributions to income

which result from the functional integration and centraliza-

tion of management which exist in a unitary operation. It

is “misleading to characterize the income of the business as

having a single identifiable ‘source.’ Although separate

geographical accounting may be useful for internal audit-

ing, for purposes of state taxation it is not constitutionally

required.” (Mobil Oil Corp. v. Commissioner of Taxes,

supra, 445 U.S. 425, 438; also see Exxon Corp. v. Wiscon-

sin Dept. of Revenue, supra, 447 U.S. 207, 222-223.)

Appellant contends, citing Japan Line, Ltd. v. County

of Los Angeles (1979) 441 U.S. 434, that inclusion of its

foreign subsidiaries in the apportionment formula is an

unconstitutional burden on foreign commerce. But the ques-

tion presented in Japan Line was “whether instrumentali-

ties of commerce that are owned, based, and registered

abroad and that are used exclusively in international com-

merce, may be subjected to apportioned ad valorem prop-

erty taxation by a State.” (/d., at p. 444.) The court did

not reach questions as to “taxability of foreign-owned

instrumentalities engaged in interstate commerce, or . of

A-23

domestically owned instrumentalities engaged in foreign

commerce.” (Id., at p. 444, fn. 7.) The Supreme Court dis-

tinguished situations involving a lack of apportionment

from those challenging the mathematical imprecision of

an apportionment formula. Japan Line involved a situation

“where true apportionment does not exist and cannot be

policed by this Court at all.” (Jd., at p. 455.) Thus, Jepan

Line does not affect the present case.

The Constitution of the United States (art. 1, §8) pro-

vides that “Congress shall have power... 3. To regulate

commerce with foreign nations, and among the several

states, and with the Indian tribes.” Generally, if the state

tax “is applied to an activity with a substantial nexus

with the taxing State, is fairly apportioned, does not dis-

criminate against interstate commerce, and is fairly related

to the services provided by the State,” there is no imper-

missible burden on interstate commerce. (Complete Auto

Transit, Inc. v. Brady (1977) 430 U.S. 274, 279.) But when

a state seeks to tax instrumentalities of foreign commerce,

two additional considerations are involved. The first is the

‘enhanced risk of multiple taxation. The second is that state

tax on instrumentalities of foreign commerce may impede

federal uniformity in an area where such uniformity is

essential. (Japan Line Ltd. v. County of Los Angeles,

supra, 441 U.S. 434, 446-448.) “Due to the absence of an

authoritative tribunal capable of ensuring that the aggre-

gation of taxes is computed on no more than one full value,

a state tax, even though ‘fairly apportioned’ to reflect. an

instrumentality’s presence within the State, may subject

foreign commerce ‘ “ ‘to the risk of a double tax burden to

which [domestic] commerce is not exposed and which the

A-24

commerce clause forbids.’”’ Evco v. Jones, 409 U.S., at 94,

quoting J. D. Adams Mfg. Co., 304 U.S., at 311.” (Japan

Line, Lid. v. County of Los Angeles, supra, 441 U.S. 434,

447-448.) Appellant’s multiple taxation claim rests predomi-

nantly on the conflict between the California apportionment

system and a separate accounting method. The variations

which result from the imposition of two different methods

of calculation do not necessarily violate the commerce

clause. The Supreme Court has consistently held that the

commerce clause “does not call for mathematical exactness

nor for the rigid application of a particular formula; only

if the resulting valuation is palpably excessive will it be

set aside.” (Northwest Airlines v. Minnesota (1944) 322

U.S. 292, 325 [Stone. C.J., dissenting], quoted in Japan

Line, Ltd. v. County of Los Angeles, supra, 441 U.S.

434, 455.)

_ The totally international character of the corporate tax-

payer in Japan Line is distinguished from the present situa-

tion where a United States parent corporation attempts to

‘sever ties with its foreign subsidiaries for purposes of

state taxation. The taxes levied by California are against

appellant, a United States corporation doing business in

the State of California, as opposed to a tax upon the for-

eign subsidiaries. The normal variations entailed in the

use of different accounting formulas do not create such

multiple taxation problems as to require its prohibition

here. Further, the tax imposed in Japan Line was on

instrumentalities of foreign commerce. By contrast, the

tax imposed here is on total corporate operations; there is

no curb on the free flow of commerce.

A-25

The unilateral act of one state may not be permitted

to impede the conduct of United States foreign relations

and foreign trade.’ Appellant argues that the California

approach could lead to retaliation and the imposition of a

heavier tax burden by other states. Appellant underscores

the differences between the federal tax scheme and the

California formula apportionment method. Appellant in-

sists that use of the federal separate accounting methods

would simplify and standardize the worldwide approach to

taxation. Adoption of the federal approach would pur-

portedly reduce or eliminate impediments to the flow of

capital and technology between the nations. But federal

legislation requiring a uniform method for state taxation

has never been adopted. (See Mobil Oil Corp. v. Commis-

sioner of Taxes, supra, 445 U.S. 425, 449.) The California

statutory scheme here adopted does not impermissibly

‘Examples of ways in which state government formulas may

impede federal uniformity are provided in Japan Line Ltd. v.

County of Los Angeles, supra, 441 U.S. 434, 450-451: “A state tax

on instrumentalities of foreign commerce may frustrate the achieve-

ment of federal uniformity in several ways. If the State imposes an

apportioned tax, international disputes over reconciling apportion-

ment formulae may arise. If a novel state tax creates an asymmetry

in the international tax structure, foreign nations disadvantaged by

the levy may retaliate against American-owned instrumentalities

present in their jurisdictions. Such retaliation of necessity would

be directed at American transportation equipment in general, not

just that of the taxing State, so that the Nation as a whole would

suffer. If other States followed the taxing State’s example, various

instrumentalities of commerce could be subjected to varying de-

grees of multiple taxation, a result that would plainly prevent

this Nation from ‘speaking with one voice’ in regulating foreign

commerce.

A-26

burden international commerce. Appellant, the parent cor-

poration, is engaged in a unitary operation with its foreign

subsidiaries. Thus, the total corporate operations are sub-

ject to California’s apportionment formula.

The judgment is affirmed.

Certified for publication.

Christian, J.

We concur:

Caldecott, P. J.

Poche, J.

[The judgment of the Court of Appeal is set forth in the final

paragraph of its opinion and is not separately entered in the rec-

ords of the Court.]

A-27

Appendix 5

California Superior Court

City and County of San Francisco

No. 673-492

Container Corporation of America,

Plaintiff,

Vs.

Franchise Tax Board,

Defendant.

[Filed Sept. 14, 1979]

NOTICE OF INTENDED DECISION

The above-entitled matter having come on for trial and

evidence having been introduced by stipulation and through

testimony, and the matter having been briefed and argued,

was submitted to the Court on June 30, 1979. The Court

renders herein its decision pursuant to Rule of Court 232.

The action involves a suit for refund of franchise taxes

paid by plaintiff Container Corporation of America (here-

inafter referred to as CCA) under the Bank and Corpora-

tion Tax Laws for the income years 1963, 1964 and 1965.

The issues are whether plaintiff (CCA) and its foreign

subsidiaries engaged in a unitary business and therefore

subject to formula apportionment under Revenue and Tax-

ation Code § 25101; and (2) if so, does the fact that plain-

tiff CCA’s subsidiaries were located outside the United

States render invalid the application of formula appor-

tionment?

A-28

I.

The Court finds that CCA and its foreign subsidiaries

were engaged in a unitary business and are therefore sub-

ject to formula apportionment under Revenue and Taxation

Code Section 25101. The unitary nature of a business is

established by (1) unity of ownership, (2) unity of opera-

tion, and (3) unity of use. Butler Brothers v. McColgan,

17 Cal, 2d 664 (1941), aff’d. 315 U.S. 501 (1942).

CCA owned a controlling interest in its foreign sub-

sidiaries. (Stipulation of Facts, Para. 10 and 25).

Unity of operation may be shown by central purchasing,

advertising, accounting and management divisions. Butler

Brothers v. McColgan, supra. It may also be shown by a

common legal staff, a common retirement plan and financ-

ing services provided by one component of the business to

another. Chase Brass &€ Copper Co. v. Franchise Tax

Board, 10 Cal. App. 3d 496. If one of the above is not a

factor in the taxpayer’s business, its absence does not

prevent a finding of unity of operation. Honolulu Oil Corp.

v. Franchise Tax Board, 60 Cal. 2d 417.

CCA sold fibreboard, other paperboard and raw mate-

rials to the foreign subsidiaries in small amounts. (Stip.

Para. 141). CCA purchased some paper from third par-

ties and sent it to the subsidiaries who then reimbursed

CCA; the amounts involved are unknown. (Stip. Para.

143). CCA assisted the subsidiaries in their purchase of

equipment; and some equipment was purchased from CCA

itself. (Stip. Para. 147). Ninety-eight percent of the equip-

ment purchased by the Latin American subsidiaries was

purchased with the acceptance of CCA’s purchasing de-

A-29

partment. (Stip. Para. 148). CCA and all subsidiaries ex-

cept two were audited by the same accounting firm (Stip.

Para. 138). Accounting methods were not standardized

among CCA and its subsidiaries, however, CCA strove to

attain efficient accounting systems and procedures. (Stip.

Para. 139). Where a subsidiary recommended expansion

into a market unfamiliar to the subsidiary, CCA made a

study of the situation. The final decision whether to move

into a new,market was made by CCA. (Stip. Para. 28).

Major policy matters of the subsidiaries were generally

subject to review by CCA. (Stip. Para. 74). Although CCA

had a policy of “reaching decisions by mutual understand-

ing rather than domination” CCA held management of

the subsidiaries strictly responsible for their performance.

(Stip. Para. 130). Finally, CCA loaned substantial

amounts of money to its subsidiaries and guaranteed

approximately one-third of loans obtained by the sub-

sidiaries from other sources. (Stip. Para. 133). The fact

that a subsidiary can turn to its parent for financial help

is substantial evidence of unity of operation. Chase Brass

& Copper Co. v. Franchise Tax Board, 10 Cal. App. 3d

496 (1970).

CCA had control of major policy matters which is an

important element of unity of use. And CCA did make

some sales to its subsidiaries. Rf: Chase Brass & Copper

Co. v. Franchise Tax Board, supra. In addition to CCA

holding of the management of subsidiaries strictly re-

sponsible for their performance, there were CCA repre-

sentatives on the board of directors of almost all the

subsidiaries. (Stip. Paras. 78, 94 and 110; and Exhibit E).

CCA had a foreign operations staff responsible for over-

A-30

seeing the subsidiaries and for proving a channel of com-

munivations between CCA and the subsidiaries (Stip.

Poras. 144-146). Such a flow is an element of unity of use.

See Honolulu Oil Corp. v. Franchise Tax Board, supra;

and Superior Oil Corp. v. Franchise Tax Board, supra,

at 416.

The Court further finds that based on these facts there

are contributions and dependencies between CCA’s in-

state business and its out-of-state business. Therefore, the

formula allocation of income must be used. Butler Brothers

v. McColgan, supra. The only hmitation on the use of the

formula allocation of income is that it “must not produce

an unreasonable result.” Id. at 671. An unreasonable re-

sult has not been demonstrated by plaintiff. Furthermore,

the operations within and without the state need not be

“necessary and essential” to each other and to the business

as a whole for the in-state operations to be an integral

part of a unitary business. Superior Oil Corp. v. Franchise

Tax Board, supra, at page 413-414.

Il.

The Court finds that the fact that CCA’s subsidiaries

are located outside the United States does not render

invalid the application of formula apportionment. The fact

that a business operates in foreign countries, rather than

only in foreign states, does not prevent the Court from

finding that CCA and its foreign subsidiaries constitute a

unitary business. (See Superior Oil Corporation v. Fran-

chise Tax Board, supra, and Honolulu Oil Corporation

v. Franchise Tax Board, supra.) The Court is satisfied that

such a finding does not contravene any constitutional

provisions.

A-31

CCA has failed in its proof to demonstrate that the

application of formula apportionment would deny it due

process. The United States Supreme Court has upheld

the unitary treatment of a foreign corporation and its in-

state operations against due process challenges. (See

Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission

(1924) 266 U.S. 271.) Similarly, application of formula

apportionment would not violate the Commerce Clause.

In Bass, Ratcliff € Gretton, supra, the unitary treatment

of a foreign corporation and its in-state operations was

upheld against Commerce Clause challenges.

The Court finally finds that Japan Line, Ltd. v. County

of Los Angeles ........ oe 47 U.S. Law Week 4477

(1979) is distinguishable from the facts herein and not

applicable. The Court did not reach the question of “the

taxability of foreign-owned instrumentalities engaged in

interstate commerce or of domestically-owned instru-

mentalities engaged in foreign commerce.” Id. at ........ N. 7,

U.S. Law Week at 4480 N.7.

The Court therefore finds for defendant Franchise Tax

Board and against plaintiff Container Corporation of

America. Upon proper demand and in accordance with

Rule of Court 232, defendant is to prepare findings of fact,

conclusions of law, consistent with the opinions herein.

Dated: Sept. 11, 1979.

/s/ DANIEL M. HANLON

Daniel M. Hanlon

Judge, Superior Court

A-32

George Deukmejian, Attorney General

Neal J. Gobar, Deputy Attorney General

110 West A Street, Suite 600

San Diego, California 92101

Telephone: (714) 237-7308

Attorneys for Defendant

Superior Court of the State of California

City and County of San Francisco

No. 673 492

Container Corporation of America,

Plaintiff,

vs.

Franchise Tax Board,

Defendant.

(Marked Filed by Court Clerk October 23, 1979)

JUDGMENT AFTER TRIAL BY COURT

The above-entitled matter came on regularly for trial on

February 23, 1978, at 11:25 a.m., Plaintiff appearing by

its attorneys Morrison & Foerster by Franklin C. Latcham

and Prentiss Willson, Jr., and defendant appearing by its

attorneys Evelle J. Younger, Attorney General, by Philip

M. Plant, Deputy, and this being a proceeding properly

triable by the court without any jury; the court having

heard the testimony and considered the evidence together

with written and oral argument; the Court having filed its

notice of intended decision on September 14, 1979; and

findings not having been requested; and good cause ap-

pearing therefor:

A-33

It Is Hereby Ordered, Adjudged and Decreed that plain-

tiff Container Corporation of America take nothing by its

action; and that defendant Franchise Tax Board recover

its costs in the amount of $.........02.-........

Dated: October 19, 1979.

Daniel M. Hanlon

Daniel M. Hanlon, Judge

Approved as to Form:

Morrison & Foerster

By: /s/ Franklin C. Latcham

Attorneys for Plaintiff

Container Corporation of America

A-34

Appendix C

CONTAINER CORPORATION OF AMERICA

Parent and Non-One Hundred Percent Owned

Subsidiaries of Container Corporation of America

Parent: Mobil Corporation

Subsidiaries:

DOMESTIC

T. R. Miller Mill Company, Inc.

FOREIGN

Carton de Colombia, S.A.

Compania Colombiana de Empaques Bates, S.A.

Occidental de Empaques, Ltda.

Industria de Carbon del Valle del Cauca, S.A.

Reforestadora del Cauca, S.A.

Carton de Venezuela, S.A.

Fibras Internacionales de Puerto Rico

Molinos de Carton y Papel, S.A.

Cartones Nacionaies, S.A.

Cartoenvases Valencia, S.A.

Corrugadora de Carton, S.A.

Union Grafica, S.A.

A-35

Appendix D

Court of Appeal! of the State of California

in and for the

First Appellate District

Division Four

No. 48990

Container Corporation of America,

Plaintiff and Appellant,

vs.

Franchise Tax Board,

Defendant and Respondent.

(Marked Filed by Court Clerk May 4, 1981)

By the Court:

The petition for rehearing is denied.

Dated May 4, 1981

Caldecott, P.J.

A-36

Appendix E

Order Denying Hearing

After Judgment by the Court of Appeal

lst District, Division 4, Civil No. 48990

In the Supreme Court of the State of California

In Bank

Container Corporation of America

v.

Franchise Tax Board

Appellant’s petition for hearing Denied.

(Marked Filed by Court Clerk June 17, 1981)

Bird

Chief Justice

Franklin C. Latcham

Prentiss Willson, Jr.

Thomas H. Steele

Morrison & Foerster

One Market Plaza

Spear Street Tower

San Francisco, CA 94105

Telephone: (415) 777-6000

Attorneys for Plaintiff and Appellant

Container Corporation of America

In the Court of Appeal

of the

State of California

First Appellate District

Division Four

1 Civil No. 48990

Container Corporation of America,

Plaintiff and Appellant,

vs.

Franchise Tax Board,

Defendant and Respondent.

(Marked Filed by Court Clerk July 31, 1981)

NOTICE OF APPEAL TO THE

SUPREME COURT OF THE UNITED STATES

Notice is hereby given that Container Corporation of

America, the Plaintiff and Appellant above-named, hereby

appeals to the Supreme Court of the United States from

A-38

the entire final judgment of the Court of Appeal of the

State of California entered in this action on April 14, 1981

(Petition for Rehearing denied by the Court of Appeal on

May 4, 1981; Petition for Hearing denied by the Supreme

Court of California on June 17, 1981), affirming the judg-

ment of the Superior Court of the State of California, in

and for the City and County of San Francisco.

This appeal is taken pursuant to 28 U.S.C. § 1257(2).

Dated: July 31, 1981.

Franklin C. Latcham

Prentiss Willson, Jr.

Thomas H. Steele

Morrison & Foerster

By FRANKLIN C. LATCHAM

Franklin C. Latcham

Counsel for Plaintiff

gnd Appellant

A-39

Appendix G

Title 18, California Administrative Code, § 25120: ...

(b) Two or More Businesses.—One corporate entity

may have more than one “trade or business.” In such

cases, it is necessary to determine the business income

attributable to each separate trade or business. The

income of each business is then apportioned by an

apportionment formula which takes into consideration

the instate and outstate factors which relate to the

business the income of which is being apportioned.

Example: The taxpayer is a conglomerate with

three operating divisions. One division is engaged in

manufacturing aerospace items for the federal govern-

ment. Another division is engaged in growing tobacco

products. The third division produces and distributes

motion pictures for theaters and television. Each

division operates independently; there is no strong

central management. Each division operates in this

state as well as in other states. In this case, it is fair

to conclude that the taxpayer is engaged in three sep-

arate “trades or businesses.” Accordingly, the amount

of business income attributable to the taxpayer’s trade

or business activities in this state is determined by

applying an appropriate apportionment formula to the

business income of each business.

The determination of whether the activities of the

taxpayer constitute a single trade or business or more

than one trade or business will turn on the facts of

each case. In general, the activities of the taxpayer

will be considered a single business if there is evi-

dence to indicate that the divisions under considera-

tion are integrated with, dependent upon ov contribute

to each other and the operations of the taxpayer as a

A-40

whole. The following factors are considered to be good

indicia of a single trade or business; and the presence

of any of these factors creates a strong presumption

that the activities of the taxpayer constitute a single

trade or business:

(1) Same type of business: A taxpayer is gener-

ally engaged in a single trade or business when all of

its activities are in the same general line. For example,

a taxpayer which operates a chain of retail grocery

stores will most always be engaged in a single trade

or business.

> _ .

A-41

Appendix H

Hourly Earnings Rates Translated into United States Dollars for

Wage Earners in Manufacturing Industries’

Year

Country 1967 1968 1969

United States ............. $2.83 $3.01] ol $3.19

be FS Fi oo Bethy 1.21M 1.28M 1.36M

75F SOF 96F

GSC 88 93 99

Barbados . 34 39 43

SE cs acy sipiv he vows Cowes the’ 1.04M 1.09M 1.19M

S7F T1F 77F

er Sve,. os Lehn pa dauhe. 38 35 41

ES Ce eae oe .18M 17M 17M

15F 14F 15M

I ao ek Ue 2.22 2.40 2.60

SS eae 36 36 38

ES a 29 30 31

ee EE TOE 1.62 1.80 2.02

Ne i ee .20 22 31

Lt Get) APE eae 1.00M 1.12M 1.21M

.69F .T7F S85F

A a a ee Fae 69 77 76

Germany, F.R. 1.25M 1.30M 155M

S6F .90F 1.08F

a .28 31 33

a 42 46 50

ORR it ae 68 71 78

oo Rs Se, ee 65 77 91

a UIE en aa ll 17

REN EG eae a 62 65 .68

ee ee 92 97 1.28

| NR Se i, OP ay ee 1.46M 157M 1.72M

Philipp ae

IETS ats ay Pe

a SRR cen? nie 1.39 1.55 1.65

pase RR > ag ae ene Al 45 50

al: Aes SEO ERS Baa esi 13 14 14

iy ES aS = ee ets a 191M 2.02M 2.21M

1.47F 1.57F 1.74F

es SRR Ss eee 1.33 1.42 1.49

United Kingdom ............... 1.16 1.23 1.34

Venezuela aa GOT AA Tala 99 1.07 1.04

*Source: United Nations, monthly Bulletin of Statistics, Decem-

ber 1972, Table 57, at 148, based on data from International Labour

Office.

M refers to wages of males and F, wages of females; in other

countries single composite figures are given. Figures normally in-

A-42

clude bonuses, cost of living allowances, taxes, social insurance con-

tributions payable by the employed person and, in some cases, pay-

ments in kind. They normally exclude social insurance contributions

payable by the employers, family allowances and other social secu-

rity benefits. In a few instances, family allowances and salaried

employees have been included in the figures. The information pub-

lished by the United Nations is stated in terms of the local currency,

which we have translated into dollars by the applicable midpoint

exchange rates (in most cases) published in the United Nations

Statistical Report, p. 216. In these cases in which daily, weekly, or

monthly wage rates are given in the U.N. figures, we have assumed

an 8-hour day, 44-hour week or 190.5-hour month for conversion

purposes, which we regard as highly conservative. The foregoing

table omits some of the countries as to which information is pro-

vided, most of which are in the Soviet bloc. In all cases with respect

to the countries omitted, the average hourly earnings are substan-

tially below those of the United States.

A-43

Appendix I

Percentage of U.S. Average Hourly Compensation, Adjusted for

Estimated Differences in Productivity’

Country 1060 1970

EE acts Garth's 3 Fakdee sx nan dds cabenes 40 40

ling ang keso on0'ken-o 950s ces 8 61 72

ay 5 a eo Sevevaw seePue v0 65 68

NE ad bag in Coes) kn vn o ween oo Dians 60 61

YI MEs 0 Kvn: Wasa pedivad s bkeAee ne 79 82

MA is ten ovhe ch eawinn onceds bhness 58 54

Ee Le vs chi ater pehaten ohekeeat 62 67

Rin o0Gdblnn Viksce fas vedtivkess 74 71

bd. <a, SUDA e Oks deeb enh ocabade 72 74

‘Source: United. States Tariff Commission, Competitiveness of

U.S. Industries (T.C. Publication 473) at 30 (1972).