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

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## Record

- **Collection:** Supreme Court brief
- **Document type:** Amicus Curiae Brief
- **Published:** January 1, 1992
- **Citation:** 504 U.S. 768

## Text

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),

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385013_0199%3A25. Public record. Not legal advice.