Amicus Curiae Brief — Allied-Signal, Inc. v. Director, Div. of Taxation

22, FILED

No. 91-615

PAPR=] 0 1992

IN THE GFFICE OF THE Gina

Supreme Court of the Wuited St

OCTOBER TERM, 1991

ALLIED-SIGNAL INC.,

as successor-in-interest to

The Bendix Corporation,

. Petitioner,

DIRECTOR, DIVISION OF TAXATION,

Respondent.

On Writ of Certiorari to the

Supreme Court of New Jersey

BRIEF OF AMICI CURIAE

AMWAY CORPORATION, ASEA BROWN BOVERI, INC,

ASHLAND OIL, BORDEN, INC. AND

THE LIMITED STORES

IN SUPPORT OF PETITIONER

ON REARGUMENT

TIMOTHY B. Dyk

Counsel of Record

BETH HEIFETZ

EDWARD K. BILICH

JONES, DAY, REAVIS & POGUE

1450 G Street, N.W.

Washington, D.C. 20005-2088

(202) 879-3939

DAVID E. COWLING

JONES, DAY, REAVIS & POGUE

2300 Trammell Crow Center

2001 Ross Avenue

Dallas, Texas 75201

(214) 220-3939

Counsel for Amici Curiae

WILSON - Eras Printing Co., Inc. - 789-0096 - WasHiINGTON, D.C. 20001

a

Ee

TABLE OF CONTENTS

Page

TT ii

STATEMENT OF INTEREST ...................................2.... 1

INTRODUCTION AND SUMMARY OF ARGU-

MENT SE aa 2

PE EST ORE ee 5

I. THE UNITARY PRINCIPLE SHOULD BE

PRESERVED SINCE IT ALLOWS STATES

TO REACH THE FULL MEASURE OF THEIR

TAXING AUTHORITY WHILE PROVIDING

IMPORTANT PROTECTION TO MULTI-

IIE sicrseptcsinkctioncterevsenisinseesessrecmse 5

II. OVERRULING ASARCO AND WOOLWORTH

TO PERMIT NON-DOMICILIARY STATES

TO REACH PASSIVE INVESTMENT IN-

COME WOULD BE BOTH UNWARRANTED

PR ES EE 9

Ill. THE COURT SHOULD MAINTAIN.STABIL-

ITY IN THE AREA OF STATE TAXATION... 14

A. Considerations of Stare Decisis Counsel Ad-

herence to this Court’s Decisions .................... 15

B. The Failure of Congress To Legislate in this

Area also Counsels this Court Not To Over-

rule ASARCO and Woolworth ........................ 20

IV. IF THIS COURT ABANDONS THE UNITARY

BUSINESS PRINCIPLE, IT SHOULD RE-

QUIRE THAT STATES ENGAGE IN FAIR

EE 22

ETI stetscnnsentnctinsesstssnnmersnenmrensnseqnetentscannesumaasnranean 28

ii

TABLE OF AUTHORITIES

Cases

ASARCO Ine. v. idaho State Tax Comm'n, 458 U.S.

SD GD ccctcticccctiaanetaes passim

Adams Express Co. v. Ohio State Auditor, 166 US.

a 6

Adams Express Co. v. Ohio State Auditor, 165 US.

SF) | eee Se ee 6,7

Amerada Hess Corp. v. Conrad, 410 N.W.2d 124

4) See 27

Amerada Hess Corp. v. Director, N.J. Div. of

Taxation, 490 U.S. 66 (1989) -..................... 2, 22, 24, 25

American Trucking Ass’ns, Inc. v. Scheiner, 483

FS Fs | a 25

Arizona v. Rumsey, 467 U.S. 203 (1984) —.............. 14

Armco, Inc. v. Hardesty, 467 U.S. 638 (1984) _...... 3, 24

Bacchus Imports, Ltd. v. Dias, 468 U.S. 263

) | vce hens e EN 25

Bass, Ratcliff & Gretton Ltd. v. State Tax Comm'n,

fl} Fee ee 6

Bibb v. Navajo Freight Lines, Inc., 359 U.S. 520

CRED ccutsernsnsntimue 26

Boston Stock Exchange v. State Tax Comm'n, 429

' ® 7. Pee 8, 25

Burnet v. Coronado Oil & Gas Co., 285 U.S. 393

0 a ee 21

Butler Bros. v. McColgan, 315 U.S. 501 (1942) ....... 6

Caterpillar Tractor Co. v. Department of Revenue,

§e | §. f eae 8

CBS Inc. v. Comptroller of the Treasury, 575 A.2d

824 (Md. 1990) _.......... 27

Chevron Oil Co. v. Huson, 404 U.S. 97 (1971) ....18, 19, 20

City of Akron v. Akron Center for Reproductive

Health, Inc., 462 U.S. 416 (1983) 14

Commonwealth Edison Co. v. Montana, 453 U.S.

sae 21

Complete Auto Transit, Inc. v. Brady, 430 U.S. 274

(0, | a 2,12, 18, 24

Container Corp. of America v. Franchise Taz Bd.,

bt SUF, 11, 12, 18, 23, 27

iii

TABLE OF AUTHORITIES—Continued

Page

Continental T.V., Inc. v. GTE Sylvania Inc., 433

I eupubenssnnmeccesove 21

Copperweld Corp. v. Independence Tube Corp., 467

EES 15

Corn Products Refining Co. v. Commissioner of

Internal Revenue, 350 U.S. 46 (1955) —........00... 12

Exzon Corp. v. Department of Revenue, 447 U.S.

EE SES SE 11, 15, 16

F.W. Woolworth Co. v. Taxation & Revenue Dep't,

Nee ccenenccesecscencocs passim

Fargo v. Hart, 193 U.S. 490 (1904) 2.00... 25

Farmers Loan & Trust Co. v. Minnesota, 280 U.S.

EE EE 10

Ford Motor Co. v. Beauchamp, 308 U.S. 331

EEE ES EET 6

Fort Howard Paper Co. v. Oklahoma Tax Comm’n,

792 P.2d 87 (Okla. App. 1989) _.........---200---20--.-... 27

General Motors Corp. v. District of Columbia, 380

EE 26

General Motors Corp. v. Washington, 377 U.S. 436

eseuustenemeasecs 5

Goodman v. Lukens Steel Co., 482 U.S. 656 (1987) .. 15

Hans Rees’ Sons, Inc. v. North Carolina, 283 U.S.

EE EE SESS 6, 23

Helvering v. Griffiths, 318 U.S. 371 (1943) —.......... 18

Helvering v. Hallock, 309 U.S. 106 (1940) _............ 16

James B. Beam Distilling Co. v. Georgia, 111 S.Ct.

Neen eeciunmmnesansannonce 17

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

A EE EL el 24

McCarroll v. Dixie Greyhound Lines, Inc., 309 U.S.

i nseenpuovesccns 21

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

EEE passim

Monell v. Department of Social Services, 436 U.S.

EE EE Ee 14, 16, 17, 21

Moorman Mfg. Co. v. Bair, 487 U.S. 267 (1978)... passim

Moragne v. States Marine Lines, Inc., 398 U.S.

a coveitunpenonpneseconeues 16

iv

TABLE OF AUTHORITIES—Continued

Page

National Bank v. Whitney, 108 U.S. 99 (1880) ....... 17, 21

National Bellas Hess, Inc. v. Department of Reve-

nue, 386 U.S. 753 (1967) . 10

Nippert v. Richmond, 327 U.S. 416 (1946) ............ 25

Norfolk & Western R. Co. v. Missouri State Tax

Comm’n, 390 U.S. 317 (1868) -........................... 10, 23, 27

Northwestern States Portland Cement Co. v. Min-

nesota, 358 U.S. 450 (1959) ......--2.......-2------ee--e--e- 6, 21

Patterson v. McLean Credit Union, 491 U.S. 164

CRD ccsczcensndshniictnhinedtiiinnnigiissiiatipiesinniginendin .. 14,15

Payne v. Tennessee, 111 S. Ct. 2597 (1991) -......... 14, 16

Pullman’s Palace Car Co. v. Pennsylvania, 141 U.S.

oy) ee coe 6

Quill Corp. v. North Dakota, ‘No. 91- 194 (U. s.

cert. granted Oct. 7, 1991) —......--------2-.222e-2ee-eeee--- 4, 22

Southern Ry. Co. v. Kentucky, 274 U.S. 76 (1927)... 25

Standard Oil Co. v. Peck, 342 U.S. 382 (1952) ....... 24

State Railroad Tax Cases, 92 U.S. 575 (1876) ........ 6

Swift & Co. v. Wickham, 382 U.S. 111 (1965) -........ 18

Thomas v. Washington Gas Light Co., 448 U.S. 261

CREED <sccnstnstiininsnstittihsenstanktiileamtinanpinaamisiniandipslbaptmesens 16

Thornburgh v. American College of Obstetricians

and Gynecologists, 476 U.S. 747 (1986) -.............. 14

Trinova Corp. v. Michigan Dep’t of Treasury, 111

OF ans ev a een Oe OO Oe passim

True v. Heitkamp, 470 N.W.2d 582 (N.D. 1991)... 27

Twentieth Century-Fox Film Corp. v. Depart-

ment of Revenue, 700 P.2d 1085 (Or. 1985) ......... 27

Tyler Pipe Industries, Inc. v. Washington Dep’t of

Revenue, 483 U.S. 232 (1987) ...................-----..-..--- 24

Union Tank Line Co. v. Wright, 249 U.S. 275

RTE ER ak ae ee OE De 25

United States Glue Co. v. Oak Creek, 247 U.S. 321

SESS eee ee ee es 5 cee CR 7

United States v. South Buffalo R. Co., 333 U.S. 771

0 Se ee a CS ee 21

Vasquez v. Hillery, 474 U.S. 254 (1986) —.............. 16

Wallace v. Hines, 253 U.S. 66 (1920) .................. 5, 6, 7, 25

v

TABLE OF AUTHORITIES—Continued

Page

Walling v. Halliburton Oil Well Cementing Co., 331

Ne Se I, seteloichellctatlaebitreniitenicedspermanemapssungevesee 17

Welch v. Texas Dep't of Highways and Public

Transportation, 483 U.S. 468 (1987) ........0.0000..... 14

Western Union Telegraph Co. v. Taggart, 163 U.S.

pe ER a ars TE A A LIS 6

Westinghouse Electric Corp. v. Tully, 466 U.S. 388

RES CLE aT ce ER A oe 24

Wheeling Steel Corp. v. Fox, 298 U.S. 193 (1936)... 10

Williams v. Florida, 399 U.S. 78 (1980) ................. 16

Wisconsin v. J.C. Penney Co., 311 U.S. 435 (1940)... 8,12

United States Constitution

Tr I Os ccesmeententns 2, 20

of Xd 6 Xen 2, 15, 18, 20

Statutes

I i i cite tannin 25

Cal. Rev. & Tax Code § 25663 (West 1979 & Supp.

EE a eR 18

Md. Code Ann. Tax-General § 10-402(a) (1988

| EE 27

Mont. Code Ann. § 15-31-312 (1991) ....000000... 27

N.J. Stat. Ann. § 54:10A-8 (West 1986) 0.000000... 27°

Or. Rev. Stat. § S14.670 (IGGL) ................c0c-c-c---.-...--. 27

, henna 10

Other Authorities

E. Rudolph, State Taxation of Interstate Business:

The Unitary Business Concept and Affiliated

Corporate Groups, 25 Tax L. Rev. 171 (1970).... 4, 8,9

J. Ayre, Corporate Legal Departments: Strategies

I essennes 17

J. Hellerstein & W. Hellerstein, State and Local

ITE CEU GE, OD onccccecececcccccccececeseccsensceeeess 13

J. Hellerstein, State Taxation (1983) .......0000000000..... 9,10

L. Silverstein, Problems of Apportionment in Taz-

ation of Multistate Business, 4 Tax L. Rev. 207

pS AR ISR A AO AEE IL. 1 10

vi

TABLE OF AUTHORITIES—Continued

Page

Note, State Taxation of Interstate Business and

the Multistate Tax Compact: The Search for

a Delicate Uniformity, 11 Colum. J. Law & Soc.

Probs. 281 (1975) ......... 3

P. Hartman, Collection of the Use Tax on Out-of-

State Mail Order Sales, 39 Vand. L. Rev. 993

(1986) ROT | BET CAPES Tee oe 21

The Federalist, No. 78 (A. ‘Hamilton) (H. Lodge

SS 14

Uniform Division of Income for Tax Purposes Act

BS rae eee ee 11, 12, 16, 26, 27

W. Knepper, Liability of Corporate Officers and

Directors § 14.02 (3d ed. 1978) ..............-..--.-.------ 17

W. Pierce, The Uniform Division of Income for

State Tax Purposes, 35 Taxes 747 (1957) ......... 13

1 State Tax Guide (CCH) { 10-110 ~...000000000..... 8

1920 Model Business Income Tax Act .................... 10

IN THE

Suprene Court of the Wuited States

OCTOBER TERM, 1991

No. 91-615

ALLIED-SIGNAL INC.,

as successor-in-interest to

The Bendix Corporation,

. Petitioner,

DIRECTOR, DIVISION OF TAXATION,

Respondent.

On Writ of Certiorari to the

Supreme Court of New Jersey

BRIEF OF AMICI CURIAE

AMWAY CORPORATION, ASEA BROWN BOVERI, INC.,

ASHLAND OIL, BORDEN, INC., AND

THE LIMITED STORES

IN SUPPORT OF PETITIONER

ON REARGUMENT

STATEMENT OF INTEREST’

Amici are multistate and multinational companies that

are engaged extensively in interstate commerce. These

companies, although representing different industries,

have an interest in avoiding duplicative, burdensome, and

discriminatory state taxation, and in the orderly develop-

ment of the law in this area.

1 The parties’ letters of consent have been filed with the Clerk

pursuant to Rule 37.3 of this Court.

2

Amici did not file a brief in this case when it was

first argued, and have not now briefed the question of

how this case should be resolved under this Court’s settled

case law. However, they oppose New Jersey’s position in

this case that the Court should dispense with the uni-

tary business principle and overrule ASARCO v. Idaho

State Tax Comm’n, 458 U.S. 307 (1982), and F. W.

Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S.

354 (1982).

INTRODUCTION AND SUMMARY OF ARGUMENT

In the area of state taxation, the protections of the

Commerce Clause and the Due Process Clause are nearly

identical. As this Court summarized in Complete Auto

Transit, Inc. v. Brady, 480 U.S. 274, 279 (1977), the

constitutional requirements are satisfied if “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.” This test, although for-

mulated to meet Commerce Clause standards, “encom-

passes as well the Due Process requirement that there

be ‘a minimal connection between the interstate activities

and the taxing State, and a rational relationship between

the income attributed to the State and the intrastate

values of the enterprise.” Trinova Corp. v. Michigan

Dep’t of Treasury, 111 S. Ct. 818, 828 (1991) (quoting

Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425,

436-37 (1980) (internal quotations omitted) ).

This case implicates two of those requirements: nexus

and fair apportionment. But underlying both of those

requirements is the central purpose of the Commerce

Clause—to prevent discrimination against interstate com-

2 See Trinova Corp. v. Michigan Dep't of Treasury, 111 S.Ct. 818,

828 (1991); Mobil Ow Corp. v. Commissioner of Taxes, 445 U.S.

425, 443 (1980); Amerada Hess Corp. v. Director, N.J. Div. of

Tazation, 490 U.S. 66, 80 (1989) (Scalia, J., concurring).

3

merce. Where a state seeks to tax values beyond its

borders, either by allocating income to the state as to

which there is no nexus or by unfair apportionment,

there is a risk that the state may be discriminating

against interstate commerce in two ways.

To begin with, the taxing state may be seeking to

eliminate a competitive advantage enjoyed by another

state that has determined to attract interstate businesses

through a lower tax rate or a narrower tax base. For

example, a state seeking to encourage business within its

borders may choose to exempt from taxation certain kinds

of passive income of corporations having their commer-

cial domicile in the state. This Court only last Term

made clear the legitimacy of a state tax policy designed

to attract such business,* and the threat to such competi-

tion posed by extraterritorial taxation is obvious. If

other states can tax income that is not rightfully subject

to their jurisdiction or tax a disproportionate share of

income, any advantage conferred by the low-tax state

would be, at the very least, substantially diluted.

Additionally, the taxing state may in fact be discrimi-

nating against interstate commerce by creating a taxing

scheme that, while factally neutral, imposes dispropor-

tionate burdens on interstate business. A state tax for-

mula that is “significantly out of line” with the prac-

tices in other states may in fact be designed to discrimi-

nate against out-of-state business, thereby harming inter-

state commerce.*

3 See Trinova, 111 S.Ct. at 835 (“States are free to ‘structur[e]

their tax systems to encourage the growth and development of

intrastate commerce and industry’”) (quoting Boston Stock Ezx-

change v. State Tax Comm’n, 429 U.S. 318, 324-328 (1977));

Armco, Inc. v. Hardesty, 467 U.S. 638, 645-646 (1984).

*See Moorman Mfg. Co. v. Bair, 4837 U.S. 267, 295 (1978)

(Powell, J. dissenting). See ulso Note, State Tazration of Inter-

state Business and the Multistate Tax Compact: The Search for a

Delicate Uniformity, 11 Colum. J. Law & Soc. Probs. 231, 236-237

and nn.15-16 (1975).

4

Inconsistent state interests and laws have long stymied

attempts to impose federal uniformity in the area of in-

terstate taxation. In the meantime, states have become

increasingly aggressive in interstate taxation.‘ However,

the unitary business principle has for over a century

stood as a protection against such extraterritorial and

potentially discriminatory taxation. The State in this

case seeks to eviscerate that protection. At the argument

in this case, New Jersey for the first time requested that this

Court overrule ASARCO Inc. v. Idaho State Tax Comm'n,

458 U.S. 307 (1982), and F.W. Woolworth Co. v. Taxation

& Revenue Dep't, 458 US. 354.(1982), on two grounds.”

Tr. at 31-32. First, the State urged that nondomiciliary

states be permitted to apportion the unrelated passive in-

vestment income of unitary businesses. Second, New Jer-

sey urged that the unitary business principle be aban-

doned entirely so that all income may be apportioned

by any state in which the overal! business conducts any

operations. For example, if a corporation with one af-

filiate manufacturing computers on the East Coast has

a wholly separate affiliate operating an amusement park

on the West Coast, it may now structure its operations

so that there is no relationship, apart from common

ownership, between the East Coast affiliate and the West

Coast operation. Nonetheless, under New Jersey’s argu-

ment, the state with the computer business would appor-

tion the income generated from the entire enterprise, de-

spite the complete @bsence of a connection between that

state and the amusement park business.

5 See, ¢.g., E. Rudolph, State Tazation of Interstate Business:

The Unitary Business Concept and Affiliated Corporate Growps, 25

Tax L. Rev. 171, 177 (1970).

* See e.g., Quill Corp. v. North Dakota. No 91-194 (U.S. cert.

granted Oct. 7, 1991).

T Although New Jersey did not urge these positions in its initia!

brief in this Court, the argument was raised by California and

eight other states in their brief amici cures Am. Br. 20

References herein to “Tr.” are to the Transeript Argument

(March 4, 1992).

5

While states may, consistent with Due Process, look

beyond their borders to “get the true values of the things

within it,” it has long been this Court’s position that the

Constitution does not permit this authority to “expose the

heel of the system to a mortal dart—not, in other words,

to open to taxation what is not within the State.” Wal-

lace v. Hines, 253 U.S. 66, 69 (1920) (Holmes, J.).

And as the Court reiterated just two Terms ago in

Trinova Corp. v. Michigan Dep’t of Treasury, 111 S. Ct.

at 836, the Constitution is “a defense against state taxes

which . . . either give rise to serious concerns of double

taxation, or attempt to capture tax revenues that, un-

der the theory of the tax, belong of right to other

jurisdictions.”

A primary protection in this area has been the unitary

business principle, which has long stood as “the linchpin

of apportionability. . . .” Mobil Oil Corp., 445 U.S. at

439. The rules with respect to the attribution of income

of passive investments have produced a similar, but more

limited protection. No one is suggesting that this Court

should attempt to issue a uniform state code of taxation,

but neither should the Court eviscerate the protection

against unfair, burdensome, and discriminatory taxation

provided by the unitary business principle and the pas-

sive investment rule.

ARGUMENT

I. THE UNITARY PRINCIPLE SHOULD BE PRE-

SERVED, SINCE IT ALLOWS STATES TO REACH

THE FULL MEASURE OF THEIR TAXING AU-

THORITY WHILE PROVIDING IMPORTANT PRO-

TECTION TO MULTISTATE BUSINESSES.

For a century, the unitary business principle has gov-

erned state taxation, serving as both a grant of authority

to states to look beyond their borders (in order to value

properly the instate activities of a multistate business) and

as a bar to taxing values that are unrelated to the instate

activities of a business. See, e.g., General Motors Corp.

6

v. Washington, 377 U.S. 436, 439 (1964) ; Northwestern

States Portland Cement Co. v. Minnesota, 358 U.S. 450,

460 (1959); Butler Bros. v. McColgan, 315 U.S. 501,

508 (1942); Ford Motor Co. v. Beauchamp, 308 U.S.

331, 336 (1939); Hans Rees’ Sons, Inc. v. North Caro-

lina, 283 U.S. 128, 132-183 (1931); Bass, Ratcliff &

Gretton Ltd. v. State Tax Comm’n, 266 U.S. 271, 282

(1924); Wallace v. Hines, 253 U.S. at 69; Adams Ex-

press Co. v. Ohio State Auditor, 165 U.S. 194, 221-222

(1897); Adams Express Co. v. Ohio State Auditor, 166

U.S. 185, 219-224 (1897). However, under New Jersey’s

broader theory—that the unitary business principle should

be eliminated entirely—every operation commonly owned

would be treated, for state taxation purposes, as a single

unitary business regardless of its relationship to the in-

state activities.

The “unitary” concept arose in the late 19th century

as a method for valuing transportation and communica-

tion systems that traversed state boundaries. The Court

recognized that a state could assess a tax by valuing the

entire property as a unit and, through application of a

formula, determine the taxing state’s share of that value.

See, e.g., Pullman’s Palace Car Co. v. Pennsylvania, 141

U.S. 18, 26 41801+,.Western Union Telegraph Co. v.

Taggart, 163 U.S: 1, 18 (1896). This “unit rule” ac-

counted for the fact that through common ownership and

use, the true value of the property may exceed the cost

of the property itself. See State Railroad Tax Cases,

92 U.S. 575, 608 (1876). Thus, the value of the miles

of railway track within a state is heightened when that

track crosses into a second state. A failure to account

for that aspect would result in undervaluing the instate

miles of track. As this Court has recognized,

The only reason for allowing a State to look beyond

its borders when it taxes the property of foreign

corporations is that it may get the true value of the

things within it, when they are part of an organic

system of wide extent, that gives them a value above

what they otherwise would possess.

7

Wallace v. Hines, 253 U.S. at 69. At the same time this

Court made clear that “(t]he purpose is not . . . to open

to taxation what is not within the State. Therefore no

property . .. situated [out-of-state] can be taken into

account unless it can be seen in some plain and fairly in-

telligible way that it adds to the value of the [enter-

prise] and the rights exercised in the State.” /d.

Although first applied to cases in which physical unity

was manifest, the rule was soon applied where only opera-

tional, rather than physical, unity was present. See

Adams Express Co., 165 U.S. at 220. Although physically

unconnected, the value of an express company’s property

in one state would not be fairly reflected without con-

sidering its operational connection to property in other

states. The principle was then extended to the income

tax calculations for companies operating across state lines.

See United States Glue Co. v. Oak Creek, 247 U.S. 321,

328-329 (1918).

Translated to the modern enterprise, the unitary busi-

ness is one in which corporate constituents are in-

volved in an economically functionally-related enterprise.

If a corporation’s income-producing activity in one state

is inextricably linked with its activities in another state,

or if the businesses of separate affiliates are intertwined,

there is a unitary business. The taxable income is thus

apportioned to a state based on the total income pro-

duced, without regard to state lines or corporate struc-

ture. The requisite unity is, however, more than owner-

ship. “It is a unity of use, not simply for the convenience

or pecuniary profit of the owner, but existing in the very

necessities of the case—resulting from the very nature of

the business.”” Adams Express Co., 165 U.S. at 222.

Although the unitary business principle is central to

this Court’s state taxation” jurisprudence, New Jersey

asks that it be abandoned. The unitary principle, how-

ever, ably serves its intended purpose. A state’s taxing

power must “bear fiscal relation to protection, opportuni-

8

ties and benefits given by the state.” Wisconsin v. J.C.

Penney Co., 311 U.S. 485, 444 (1940). Simply put, the

state mist have given something “for which it can ask

return.” Jd. New Jersey has given no insight into the

benefits it provides to an out-of-state business having no

connection with the State. Given the radical nature of

New Jersey’s request—wholesale abandonment of a central

tenet of constitutional doctrine—it would be expected that

New Jersey would show that the unitary system some-

how prohibits it from reaching what rightfully belongs to

New Jersey. New Jersey has not even suggested, much

less made a showing, that the existing unitary structure

has deprived it of the ability to capture income that is

properly its to tax. Nor has it shown that the unitary

principle is unworkable. In short, New Jersey has estab-

lished no basis for overruling the unitary cases stretching

back over a century, and allowing s’ates to sweep within

their taxing jurisdiction activities wholly unrelated to

instate business.

This improper expansion of state power to tax is of

particular concern in those states that require combined

reporting.* Under combined reporting, the income of

§ A combined report is an “accounting method whereby each mem-

ber of a group carrying on a unitary business computes its indi-

vidual taxable income by taking a portion of the combined net

income of the group.” Caterpillar Tractor Co. v. Department of

Revenue, 618 P.2d 1261, 1263-64 (Ore. 1980) (emphasis in original).

A number of states currently require combined reporting for

unitary businesses (see, e.g. Arizona, California), while others pro-

vide for it under certain circumstances (see, e.g., Michigan, New

York). See 1 State Tax Guide (CCH) { 10-110 at 1071-1072. Com-

bined reporting may be required by statute, by regulation, or by

directive of the taxing authority.

Unlike a combined return, a consolidated return is appropriate

for corporate affiliates, all of which are taxable in the state. The

separate entities of the various member corporations are disre-

garded, the consolidated income of the entire group is reported on a

single return, and a single tax is paid on that income. Rudolph,

25 Tax L. Rev. at 197.

9

affiliates that are not taxable in the state are nonetheless

included in the determination of an instate corporation’s

income. Combined reporting requires that the income of

a business conducted partly within and partly without the

taxing state be determined and apportioned in the same

manner regardless of whether the business is conducted

by one corporation or by two or more affiliated corpora-

tions.’ If the unitary business principle were abandoned,

the state could, through revision or reinterpretation of

existing law, require entities engaged in separate busi-

nesses that are unrelated except for common corporate

ownership to file a single combined return. The state

would thus be taxing a business on the income of an

affiliated entity engaged in wholly unrelated activities.

And, as described below, because of the broad flexibility

states currently have with respect to apportionment for-

mulas, see Moorman Mfg. Co. v. Bair, 487 U.S. 267, 274

(1978), constitutional restraints on state apportionment

provide little, if any, protection against states reaching

extra-territorial values. This Court should not thus ex-

pand state tax jurisdiction, particularly based on the

incomplete record in this case.'®

Il. OVERRULING ASARCO AND WOOLWORTH TO

PERMIT NON-DOMICILIARY STATES TO REACH

PASSIVE INVESTMENT INCOME WOULD BE

BOTH UNWARRANTED AND DISRUPTIVE.

New Jersey, in a proposal somewhat less radical than

abandoning the unitary principle, has alternatively re-

quested that the Court modify the unitary business prin-

ciple to permit it to reach the income of passive invest-

* See Rudolph, 25 Tax L. Rev. at 197; J. Hellerstein, State Taxa-

tion § 8.12, at 462-63 n.527 (1983).

' Because New Jersey had not raised this claim in any of the

prior proceedings, there is an absence of a factual record on this

issue, which counsels against this Court addressing it at this

juncture.

10

ments. In so urging, it again asks that this Court over-

rule past decisions that have provided important limita-

tions on state power to tax.

Historically, States have allocated rather than appor-

tioned the income received by a unitary business from its

passive investments.'' See Moorman Mfg. Co. v. Bair,

437 U.S. at 272-73; National Bellas Hess, Inc. v. Depart-

ment of Revenue, 386 U.S. 753, 756 (1967); Norfolk &

Western R. Co. v. Missouri State Tax Comm'n, 390 U.S.

317, 325 (1868). Like real property, the location of in-

tangible property was considered determinable; there-

fore, so long as it did not form an “integral part[] of

some local business,” Farmers Loan & Trust Co. v.

Minnesota, 280 U.S. 204, 213 (1930), such property was

located at the business situs or commercial domicile, and

was properly attributable in full to that state. See

Wheeling Steel Corp v. Fox, 298 U.S. 198 (1986).

Recognizing the appropriateness of this practice, Wis-

consin, in creating the modern corporate income tax,

provided for apportionment of most income, but retained

the allocatation of income derived from passive invest-

ments. See Wis. Stat. § 1087 m-1 (1911). The 1920

Model Business Income Tax Act adhered to this approach,

and by 1940, most states with corporate income taxes did

so as well."* Adhering to the long-standing practice, the

majority of states today allocate passive investment in-

come to the state of domicile,” and it is the specified treat-

™! “Allocation” refers to attributing an item of property, income,

receipts, and the like to a particular state, based on tracing the

source of income to that State. Hellerstein, State Tazation 8.4, at

328 n.95. Where a state “allocates” income, it taxes 100% of that

income. In contrast, apportionment is the assignment of that por-

tion of an enterprise’s total income that is attributable to the tax-

ing state. See id.

*? See L. Silverstein, Problems of Apportionment in Tazation of

Multistate Business, 4 Tax L. Rev. 207, 210 (1949).

*8 See Appendix to Brief of Allied-Signal on Reargument.

11

ment in the Uniform Division of Income for Tax Purposes

Act (“UDITPA”). See UDITPA § 1(a) & (e).

This approach comports with longstanding constitu-

tional doctrine developed from the unitary business cases.

The Court consistently has found that the Due Process

and Commerce Clauses prohibit state taxation absent a

minimal _connection between the interstate or interna-

tional activities and the taxing state, and a rational rela-

tionship between the income attributed to the state and

the intrastate values of the enterprise. See, e.g., Exxon

Corp. v. Department of Revenue, 447 U.S. 207, 219-20

(1980). The unitary nature of the business supplied the

nexus and rational relationship essential to apportion-

ment. As the Court has recognized, “the linchpin of ap-

portionability in the field-of state income taxation is the

unitary business principle.” Mobil Oil Corp., 445 U.S.

at 439.

In ASARCO Ine. v. Idaho State Tax Comm’n, and

F.W. Woolworth Co. v. Taxation and Revenue Dep’t, this

Court made clear that the constitutional limitations pre-

clude states from including in the taxable income of a non-

domiciliary parent corporation the passive investment in-

come of subsidiaries that have no other connection with

the taxing state. The Court has subsequently reiterated

that an exchange of value beyond “the mere flow of funds

arising out of a passive investment” is necessary before

a State may permissibly tax the out-of-state income from

passive, uncontrolled investments of an otherwise unitary

business. Container Corp. of America v. Franchise Tax

Bd., 463 U.S. 159, 166 (1983).

New Jersey’s request that this longstanding approach

be reversed raises several problems. To begin with, the

gain or loss from passive investments is a product of

managerial activities and decision-making occurring in

the commercial domiciliary state, not in the state in which,

for example, the nondomiciliary corporation operates a

manufacturing concern. The intangibles giving rise to

dividends are generally acquired, managed, and held at

12

the taxpayer’s headquarters in the state of commercial

domicile. While New Jersey may have a relationship to

Bendix’s organic business activities, New Jersey has not

demonstrated that it provides any sort of benefit to or

has any nexus with activities generating passive invest-

ment income. See Complete Auto, 430 U.S. at 279; Wis-

consin v. J.C. Penny Co., 311 U.S. at 443."

Additionally, as a practical matter, permitting non-

domiciliary states to tax passive investment income will

not alleviate any of the complexities that may be en-

countered in determining taxable income and will, in

fact, increase the risk of multiple taxation. States that

currently allocate passive investment income of domi-

ciliaries are likely to continue to do so."* At the same

time, other states could well seek to apportion the identi-

cal income.

Finally, New Jersey has not indicated how states would

determine their aliquot share of passive investment in-

come. It would, of course, be necessary to determine the

proper portion attributable to the unitary business (and

the state’s share of that amount) and how much instead

should be attributed to other entities. But the traditional

three-factor apportionment formulation, which is based on

the proportion of a unitary business’ total payroll, prop-

erty, and gross receipts located in the taxing state, does

not bear any sort of rational relationship to the out-of-

state values of intangible income. That formula, widely

used today for apportioning the tangible business income

4 The principle of ASARCO and Woolworth is not designed to

protect from apportionment income that is functionally related to

an enterprise, but instead income from passive investments. See

Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 180

n.19 (1983). Cf. Corn Products Refining Co. v. Commissioner of

Internal Revenue, 350 U.S. 46 (1955).

At the very least, the outcome requested by New Jersey

would require the revision of statutes in each state that has adopted

UDITPA’s distinction between business and nonbusiness (passive)

income.

13

of unitary enterprises, was designed to measure the in-

come arising from tangibles and to “reflect a very large

share of the activities by which value is generated.”

Container Corp., 463 U.S. at 183.

The theory underlying the three-factor formula, and

indeed, the basis for its acceptability for Commerce Clause

purposes, is that a dollar of payroll or property or a

dollar of sales made in one state, produces roughly the

same amount of taxable income as a dollar in another

state."* But this theory makes clear that the factors have

virtually no relevance to dividends or to capital gains de-

rived from the sale of stock in an unrelated business.”

Little of the taxpayer’s payroll is required, for example, to

collect dividends, nor is there any reason to believe that

investment income is related to the states in which goods

are sold in the taxpayer’s regular course of business

operations. Similarly, the amount of tangible property

located in the state of manufacturing has no relevance to

investment decisions made at corporate headquarters lo-

cated in a different state.

Overruling ASARCO and Woolworth would require the

Court to reexamine an unbroken line of cases holding

that, to meet the constitutional standards, a tax must be

“applied to an activity with a substantial nexus with the

taxing state.” Complete Auto, 430 U.S. at 279. It could

also create new problems in state taxation, as states with

no connection to an out-of-state activity may nonetheless

try to reach that activity’s income, leading inevitably to

multiple taxation and apportionment complications. New

Jersey has provided no basis for disrupting the current

scheme. Under these circumstances, ASARCO and Wool-

worth should be retained.

16 See J. Hellerstein & W. Hellerstein, State and Local Taxation

577 (5th ed. 1988).

17 The drafter of UDITPA has acknowledged that the allocation

and apportionment sections of the uniform act are “a formula

designed for manufacturing and merchandising businesses.” W.

Pierce, The Uniform Division of Income for State Tax Purpases,

35 Taxes 747, 749 (1957).

14

III. THE COURT SHOULD MAINTAIN STABILITY IN

THE AREA OF STATE TAXATION.

The Court has asked whether ASARCO and Woolworth

should be overruled,’* but the plain fact is that far more

is at stake. As noted above, supra pp. 5-6, New Jersey’s

proposal to have this Court abandon the unitary business

principle would undermine decades of settled constitu-

tional precedent. Even New Jersey’s narrower effort

to allow states to apportion passive investment income

would force this Court to reassess its settled principles.

Under the doctrine of stare decisis, a party seeking to

have this Court overrule precedent must provide “special

justification” ” for that extraordinary step, and that is

sorely lacking in this case.

18 See Order in No. 91-615 (March 11, 1992) (“Order’’).

Arizona v. Rumsey, 467 U.S. 203, 212 (1984). “[S]tare

decisis is a basic self-governing principle within the Judicial

Branch, which is entrusted with the sensitive and difficult task of

fashioning and preserving a jurisprudential system that is not

based upon ‘an arbitrary discretion.’” Patterson v. McLean Credit

Union, 491 U.S. 164, 172 (1989) (quoting The Federalist, No. 78,

at 490 (A. Hamilton) (H. Lodge ed. 1888)). See also Payne v.

Tennessee, 111 S. Ct. 2597, 2609 (1991); Welch v. Texas Dep't of

Highways and Public Transportation, 483 U.S. 468, 494 (1987)

(“the doctrine of stare decisis is of fundamental importance to the

rule of law”). While stare decisis has almost invincible force in

statutory cases (Monell v. Department of Social Services, 486 U.S.

658, 695 (1978)), in constitutional cases as well, “[t]here is a

strong public interest in stability, and in the orderly conduct of

our affairs, that is served by a consistent course of constitutional

adjudication.” Thornburgh v. American College of Obstetricians

and Gynecologists, 476 U.S. 747, 780-81 (1986) (Stevens, J., con-

curring). Thus, in constitutional cases, special justification is re-

quired before this Court will overrule precedent. See Rumsey, 467

U.S. at 212; City of Akron v. Akron Center for Reproductive Health,

Inc., 462 U.S. 416, 419-20 (1983).

15

A. Considerations of Stare Decisis Counsel Adherence

to this Court’s Decisions.

In determining whether to break with past decisions,

this Court has utilized a variety of considerations, each

- of which suggest that ASARCO and Woolworth should be

reaffirmed. ASARCO -and Woolworth were decided not

through incomplete analysis, but after extensive briefing

both by the parties themselves and amici representing

different perspectives on the issues. Cf., e.g., Copperweld

Corp. v. Independence Tube Corp., 467 U.S. 752, 766

(1984). Neither the law nor the factual context has

changed in the decade since those decisions were rendered:

this Court invoked ASARCO and Woolworth a year later

in Container and has not given any indication that the

unitary business principle, as applied in those decisions,

no longer limits state taxation consistent with Due Proc-

ess. Cf., e.g., Goodman v. Lukens Steel Co., 482 US.

656, 659-62 (1987); Patterson v. McLean Credit Union,

491 U.S. 164, 173 (1989). Thus, this Court should not

lightly upset this area of the law. A number of addi-

tional considerations suggest that stare decisis interests

have particular weight in this case.

First, the sheer magnitude of New Jersey’s proposed

change counsels particular caution. New Jersey’s sug-

gestion that this Court abandon the unitary business

principle would put in question literally dozens of this

Court’s precedents, all of which were grounded on the

fact that a state may include out-of-state values in its

computation of tax only when they are related to a uni-

tary business that is carried on in the taxing state. See,

e.g., Exxon, 447 U.S. at 219-220.

Even if the Court were to accept New Jersey’s nar-

rower proposition and hold that passive investment in-

come is apportionable, the change would be profound.

In addition to overruling ASARCO and Woolworth, the

Court would also have to resolve the inconsistency of its

new holding with decisions—especially Mobil and Exxon

16

—that preceded and forecast the ASARCO and Wool-

worth holdings. See ASARCO, 458 U.S. at 315 (noting

reliance on Mobil) ; Woolworth, 458 U.S. at 362 (noting

reliance on Mobil and Exxon) .*°

Second, it is hardly surprising that businesses have

planned their tax and economic affairs according to the

unitary business principle, filing their tax returns in

various jurisdictions in reliance on this Court’s settled

law. Reliance interests always require this Court to re-

assess precedents with caution,” but stability and pre-

dictability are especially important for business decision-

making. “Considerations in favor of stare decisis are at

their acme in cases involving property and contract

rights, where reliance interests are involved... .” Payne

v. Tennessee, 111 S. Ct. 2597, 2610 (1991).” Businesses

20In addition, most states would have to rework their taxation

schemes which, modeled after UDITPA, rest on the distinction be-

tween business and nonbusiness income. See supra p. 10.

21 See, e.g., Monell v. Department of Social Services, 436 U.S. at

700.

22 The core of stare decisis is that the principle furthers “the

stability and predictability required for the ordering of human

affairs over the course of time.” Williams v. Florida, 399 U.S. 78,

127 (1970) (Harlan, J., concurring in part and dissenting in part).

Stare decisis ensures that “the law will not merely change er-

ratically,” and “permits society to presume that bedrock princi ples

are founded in the law rather than in the proclivities of indi ‘id-

uals.” Vasquez v. Hillery, 474 U.S. 254, 265 (1986). It “embocies

an important social policy. It represents an element of continuity in

law, and is rooted in the psychologic need to satisfy reasonable ex-

pectations.” Helvering v. Hallock, 309 U.S. 106, 119 (1940). Among

the “weighty considerations” that “underlie the principle that courts

should not lightly overrule past decisions,” most important is

enabling individuals “to plan their affairs with assurance against

untoward surprise ....” Moragne v. States Marine Lines, Inc., 398

U.S. 375, 403 (1970). “When rights have been created or modified

in reliance on established rules of law, the arguments against their

change have special force.” Thomas v. Washington Gas Light Co.,

448 U.S. 261, 272 (1980).

st eae alien ait cai |

17

carefully tailor their operations to this Court’s decisions.”

Where businesses have justifiably relied on precedent,

overruling severely disrupts business planning and opera-

tion. Businesses have relied on ASARCO and Woolworth

for a decade, and those reliance interests would be frus-

trated by this Court’s overruling. Cf., e.g., Monell v. De-

partment of Social Services, 486 U.S. 658, 700 (1978).

Thus, as this Court has noted:

Judicial decisions affecting the business interests of

the country should not be disturbed except for the

most cogent reasons, certainly not because of subse-

quent doubts as to their soundness. The prosperity

of a commercial community depends, in a great de-

gree, upon the stability of the rules by which its

transactions are governed.

Maintaining stability in this area is particularly ap-

propriate because any change would affect the tax conse-

quences of past conduct.** Businesses have filed their tax

returns in reliance on the unitary business principle gen-

erally, and on the Court’s holdings in ASARCO and Wool-

worth that passive investment income that is unrelated to

a company’s unitary business in a taxing jurisdiction may

not be apportioned by that state. Any change in this area

28 See, e.g., W. Knepper, Liability of Corporate Officers and Di-

rectors § 14.02 at 418 (3d ed. 1978); J. Ayre, Corporate Legal

Departments: Strategies for the 1980s 98 (1984).

*4 National F nk v. Whitney, 103 U.S. 99, 102 (1880). See also,

e.g., Walling v. Halliburton Oil Well Cementing Co., 331 U.S. 17,

25-26 (1947) (because of continued recognition of the precedent

by the Court, Congressional acquiescence in the decision, and reli-

ance by business, the Court notes that “[e]ven if we doubted the

wisdom of [the precedent] as an original proposition, we should

not be inclined to depart from it at this time”).

*5 “Because it forces us to consider the disruption that our new

decisional rules cause, retroactivity combines with stare decisis to

prevent us from altering the law each time the opportunity presents

itself.” James B. Beam Distilling Co. v. Georgia, 111 8.Ct. 2439,

2450 (1991) (Blackmun, Marshall, and Scalia, JJ., concurring in

the judgment),