Opposition Brief — MeadWestvaco Corp. v. Illinois Department of Revenue

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FILED

OFFICE OF THE CLERK

SUPREM

No. 06-1413 E COURT, U.S.

In the Supreme Court of the United States

THE MEADWESTVACO CORPORATION, SUCCESSOR IN

INTEREST TO THE MEAD CORPORATION, PETITIONER,

¥.

ILLINOIS DEPARTMENT OF REVENUE, DIRECTOR OF THE

ILLINOIS DEPARTMENT OF REVENUE, AND TREASURER OF

THE STATE OF ILLINOIS, RESPONDENTS.

On Petition for Writ of Certiorari

to the Appellate Court of Illinois

—

BRIEF IN OPPOSITION

LISA MADIGAN

Attorney General of Illinois

MICHAEL A. SCODRO

Solicitor General

BRIAN F. BAROV*

Assistant Attorney General

100 West Randolph Street

Chicago, Illinois 60601

* Counsel of Record (312) 814-2234

Counsel for Respondents

QUESTION PRESENTED

The Due Process and Commerce Clauses permit a State to

tax a fraction of the income earned by a nondomiciliary

corporation from a capital transaction that served an operational

function for the business and did not arise from a mere passive

investment. See Allied-Signal, Inc. v. Director, Div. of

Taxation, 504 U.S. 768, 785, 787 (1992); Container Corp. of

Am. v. Franchise Tax Bd., 463 U.S. 159, 180 n.19 (1983). The

Illinois Appellate Court applied this fact-intensive “operational

function” test to allow Illinois to tax a portion of the gain

realized from Petitioner’s sale of its Lexis/Nexis

division—whose growth Petitioner nurtured from its inception

through both management expertise and capital contributions,

repeatedly restructured for its own tax benefit, and held out to

the government, its own shareholders, and the general public as

part of its general business operations. Does the appellate

court’s application of this “operational function test” in this

case conflict with this Court’s precedent or other state high-

court decisions, warranting the exercise of this Court’s

discretionary review?

TABLE OF CONTENTS

QUESTION PRESENTED ............ccccceccssces i

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REASONS FOR DENYING THE PFTITION .......... 6

I. The Illinois Appellate Court’s Decision Does Not Conflict

with this Court’s Decisions Establishing and Applying the

Operational Function Test. ...............000005: 7

II. The Decision of the Intermediate State Court in this Case

Does Not Conflict with Decisions of Other States’ High

I ig he te a i ee ae 15

I oon he aes 20

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TABLE OF AUTHORITIES

Cases Page

Alaska Dep't of Revenue v. OSG Bulk Ships, Inc.,

961 P.2d 399 (Alaska 1998)........5.......0.008- 15,16

Allied-Signal, Inc. v. Director, Div. of Taxation,

ER ce tbni ci bihwhewesconeesde's passim

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

i ee i ins oe apie 7,8,9:

Citicorp N. Am., Inc. v. Franchise Tax Bd.,

100 Cal. Rptr. 2d 509 (Ct. App. 2000),

cert. denied, 533 U.S. 963 (2001) .............45. 15,16

Container Corp. of Am. v. Franchise Tax Bd.,

ein hbo Kk wee oe U 6 O8de eee. passim

Corn Prods. Refining Co. v. Comm’r, 350 U.S. 46

Rit eheetaaksds'egthceweis wadep ie caked ene 8

PE Mcctivkivtts biahe thinned indwbebddcbeenas 9

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

SN ED 6 co sé6-dendncvnvscecéeneces 7,9,11,12

Hercules, Inc. v. Comm'r of Revenue,

575 N.W.2d 111 (Minn. 1998)...............005. 17,18

Hercules, Inc. v. Comptroller of Treasury,

PAE ED kad cvededccccceeveres 17,18

Hercules, Inc. v. Dep't of Revenue,

753 N.E.2d 418 (Ill. App. Ct. 2001) .......... 6,10,17,18

Hoechst Celanese Corp. v. Franchise Tax Bd.,

22 P.3d 324 (Cal.), cert. denied, 534 U.S. 1040

i pets Bebe Ce keade hue kbst +00 6s 15,18

Home Interiors & Gifts, Inc. v. Dep't of Revenue,

741 N.E.2d 998 (Ill. App. Ct. 2000) ................ 10

Illinois v. McArthur, 531 U.S. 326

eek ciel ibas oh cess 4 eke ewiedee ce is 12,13

In re Envirodyne Indus., Inc., 354 F.3d 646

ES STE Se 13

Jim Beam Brands Co. v. Franchise Tax Bd.,

34 Cal. Rptr. 3d 874 (Ct. App. 2005) .............44. 16

Mills v. Internal Revenue Serv., 840 F.2d 229

ee a Cd Ch wed pean ceed ese tesa 13

Mobil Oil Co. v. Comm'r of Taxes, 445 U.S. 425

ike bee Or a seed DA UREES 0606500 608905 9

Moorman Mfg. Co. v. Bair, 437 U.S. 267

CIE Nut eadu teh edeawhelew a buedes snes o 6é 14

Pennzoil Co. v. Dep't of Revenue, 33 P.3d 314

(Or. 2001), cert. denied, 535 U.S. 927 (2002). ..... . 17,18

People v. Ward, 215 Ill. 2d 317

Cine AS eee ea eee Ne UN s éh00e Kees ctennees 12

Statutes and Rules

35 ILCS 5/304(a) (1994)

Sup. Ct.R.10.........

Ill. Sup. Ct. R. 341(h)(7)

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BEREREBEPeREASRRASZ BRS RRR eRe Fe ee we ye

BRIEF IN OPPOSITION

STATEMENT

1. The Tax Dispute

A. Petitioner misstates or omits many of the crucial facts

of this case, beginning with its assertion in the Question

Presented that Lexis/Nexis operated as an independent,

nonunitary business of Petitioner for 26 years. In fact, for the.

tax year in question, and for the previous five years, Petitioner

treated Lexis/Nexis as a part of its unitary business group for

the purpose of Illinois income tax filings and payments. It was

not until Petitioner realized the gain from Lexis/Nexis’s sale

that Petitioner altered its position and began to claim that

Lexis/Nexis was not part of its unitary business group.

From 1988 to 1993, Mead reported over $3.8 billion in

income, of which over $800 million was from Lexis/Nexis, on

its Illinois combined income tax returns. Vol. 4, C842.' Over

these years, Petitioner also reported over $4.4 billion in

business expense deductions on its Illinois combined income

tax returns, of which over $680 million was attributable to

Lexis/Nexis. Jd. In 1994, Petitioner reported Illinois sales of

over $338 million, of which almost $47 million was contributed

by Lexis/Nexis. Pet. App. 4a.

B. Petitioner’s relationship with Lexis/Nexis, however,

began 26 years before the 1994 tax year. /d. at 2a. In 1968,

' Citations to the record on appeal will be by volume number

and page. The common law record is designated with the prefix

“C,”i.e., Vol. _,C___, and the report of proceedings with the

prefix “RP,”i.e, Vol. ,RP_.

Petitioner purchased Data Corporation for $6 million. Jd. At

the time, Data Corporation was developing ink jet printing

technologies and a full text information retrieval system for

computers. /d. By 1973, the information retrieval system had

become Lexis/Nexis. Jd. But Lexis/Nexis did not become

profitable until the end of the 1970s; until then it was supported

by Petitioner’s capital contributions. /d.; see also Vol. 9, RP

68, 92. ;

Throughout the 1980s and 1990s, Petitioner continued to

approve major capital expenditures for Lexis/Nexis to expand

its computer center and central processing units. Pet. App. 3a.

In the 1980s, impressed by its strong position in electronic

publishing, Petitioner rejected a plan to sell Lexis/Nexis, and

instead “encouraged management to continue to develop growth

plans for this division.” Vol. 7, C1502.

Also, in the 1980s and 1990s, Petitioner treated Lexis/Nexis

alternatively as a corporate division or a corporate subsidiary.

Pet. App. 2a. In 1980, Lexis/Nexis was merged into Petitioner

as a division; in 1985, it was reincorporated separately; in

December 1993, it was merged again. /d. at 2a-3a. Petitioner

undertook the mergers in order to realize substantial tax

savings, in the last case by permitting Petitioner to utilize

operating loss carry forwards that otherwise would have

expired. /d. at 13a; Vol. 7, C1741; Vol. 8, C1753.

C. In its 1993 annual report, Petitioner touted itself not only

as “‘one of the world’s largest manufacturers of paper,’ and a

leader in packaging” but also as ““the developer of the word’s

leading electronic information retrieval services for law,

patents, accounting, finance, news and business information.”

Pet. App. 3a. On its 1993 10-K form, filed with the Securities

and Exchange Commission, Petitioner likewise described itself

as engaged in the business of electronic publishing. Pet. App.

4a; Vol. 6,C1330. Consistent with this pronouncement, the 10-

K filing listed Lexis/Nexis among Petitioner ’s “business

segments,” rather than among its ‘investees.’ Pet. App. 3a-4a.

Petitioner also listed “LEXIS” and “NEXIS” as trademarks

under which it “conducts its business” and which were “of

material importance to [its] business.” Vol. 6, C1334.

When it announced plans to sell Lexis/Nexis, Petitioner

stated in a press release that it had ““grown’” Lexis/Nexis from

its inception as a “‘small legal data-base into the word’s

premier provider of online legal information and the pioneer in

computer-assisted news retrieval.’” Pet: App. 4a. (quoting Vol.

4, C930). In describing the sale in its 1994 annual report,

Petitioner again emphasized that it had “‘grown[n] this

business’” and decided to use much of the gain realized on

Lexis/Nexis’s sale to, inter alia, buy back stock.’ Jd. (quoting

Vol. 6, C1277).

D. Petitioner and Lexis/Nexis’s day-to-day business

operations were separate in some respects. /d. at 3a. Since

1980, Petitioner and Lexis/Nexis had been housed in buildings

15 miles apart. Jd. They did not share personnel, purchasing

functions, manufacturing or warehousing, they were described

as having separate corporate cultures, and there were no

favorable intercompany transactions. /d. But Petitioner did

make a nightly cash sweep of Lexis/Nexis’s bank accounts, and

Petitioner invested the money for Lexis/Nexis’s benefit “in a

manner decided by” Petitioner. Jd.

? There is a typographical error in the Illinois Appellate

Court’s decision, immaterial to the present case. The decision

states that $350,000 of the gain was used to buy back stock

(Pet. App. 4a); in fact, the amount was about $350 million,

and an additional $725 million of the gain was used to reduce

corporate debt (Vol. 4, C842).

2. Proceedings Below

Respondent Illinois Department of Revenue, made two

audit findings adverse to Petitioner for the 1994 tax year: that

Petitioner 1) improperly classified the gain from the sale of

Lexis/Nexis as income not subject to apportionment by the

State and therefore not subject to Illinois income tax (even in

part), and 2) improperly included almost $5 billion in gross

receipts on the sale of short-term financial instruments in its

sales factor denominator, rather than the $1.9 million of actual

interest income. Pet. App. at 5a. The trial court affirmed the

auditor’s finding against Petitioner on the second issue on

summary judgment, and Petitioner’s challenge to the first

finding proceeded to a bench trial. Pet. App. Sa-6a.

The trial court considered stipulated facts and heard

testimony. Petitioner retained three tax law professors to testify

as expert witnesses on the question of income apportionability:

Richard Pomp, Walter Hellerstein, and Ferdinand Schoettle. Pet.

App. 30a-31a, 48a-103a. Over Respondent’s objection, the trial

court allowed the testimony “for the [witnesses] opinions,” but

the court would not accept the “bases for the opinions” as

substantive evidence. /d. at 34a. Nevertheless, the professors

opined as to their view of the appropriate legal standard, applied

the facts to that standard, and concluded that under their standard

Lexis/Nexis was neither unitary with Petitioner, nor an

operational asset. See Vol. 9, RP 124-57, 165-92, 205-19.

The Illinois Department of Revenue’s auditor also testified

on income apportionment (Pet. App. 31a), although Petitioner

misstates his testimony. Petitioner states that the auditor

testified that “there was no functional integration between

Petitioner and Lexis/Nexis, nor was there any operational

relationship between the businesses.” Pet. 8 (emphasis in

original). In fact, the auditor specifically denied Petitioner’s

assertions that he never found functional integration, centralized

management or economies of scale. Vol. 10, RP 10-11. And on

the operational relationship question, the auditor testified only

that Lexis/Nexis was not acquired in order to supply necessary

raw materials as part of Petitioner’s supply chain. /d. He did not

testify that there was no operational relationship between the two

companies. /d.

Based on the stipulated facts and the testimony, the trial

court found that “it was not clear that there was no operational

purpose” to Lexis/Nexis. Pet. App. 38a-39a. Accordingly, the

trial court upheld Respondent Department of Revenue’s

conclusion that the gain realized on Lexis/Nexis’s sale was

apportionable business income subject to Illinois income tax. Jd.

at 6a. The appellate court affirmed in an unpublished,

nonprecedential order. Pet. App. 12a-14a, 43a. In addition to

affirming the trial court’s ruling that the gain was

constitutionally apportionable, the appellate court also affirmed

the trial court’s findings that the gain was business income under

Illinois law, and that Petitioner could not, under Illinois law, use

its total gross receipts from the sale of short-term financial

instruments to reduce its Illinois apportionable income. /d. at

la-22a.

Respondents successfully moved to publish the appellate

court’s decision because all of the decision’s holdings are

important—not just the court’s ruling on the constitutionality of

apportionment. Jd. at 42a-47a. In the motion, Respondents

pointed out that the appellate court’s rulings on the state law

sales factor issue and business income issue could potentially

impact over a dozen pending lawsuits. /d. at 44a, 46a-47a. In

contrast, the constitutional apportionment issue was important

because the present case provided a useful counterpoint to an

earlier appellate court decision, Hercules, Inc. v. Dep't of

Revenue, 753 N.E.2d 418 (Ill. App. Ct. 2001), which, on a

different set of facts, held that the gain from the sale of a capital

asset was not constitutionally apportionable under the

operational function test. Pet. App. 44a-45a.

REASONS FOR DENYING THE PETITION

The petition does not satisfy this Court’s criteria for issuing

a writ of certiorari. See Sup. Ct. R. 10: Petitioner has not

identified a conflict with this Court’s decisions establishing the

operational function test. The appellate court relied on the legal

standard articulated in Allied-Signal, Inc. v. Director, Div. of

Taxation, 504 U.S. 768 (1992), which all agree provides the

proper constitutional test. See Pet. App. 11a (stating that “the

relevant inquiry under the operational function test focuses on

the “objective characteristics of the asset’s use and its relation

to the taxpayer and its activities within the taxing State’”)

(quoting Allied-Signal, 504 U.S. at 785); Pet. 2, 12 (citing

Allied-Signal). Petitioner ’s only real criticism of the appellate

court’s decision is that it misapplied the proper standard to the

facts of this case.

Nor is the appellate court’s decision in conflict with

decisions from high courts of other States. This Court has noted

that the constitutional question of income apportionment is

“quite fact sensitive,” which by its nature allows courts “to

reach{] divergent results” in “different factual circumstances.”

Allied-Signal, 504 U.S. at 785. Other state courts have also

recognized the fact-intensive nature of the operational function

test, and have applied it with results that vary with the facts of

each case. This is not a conflict; it is the inevitable result of

applying a fact-sensitive rule to factually distinct transactions.

I. Thelllinois Appellate Court’s Decision Does Not Conflict

with this Court’s Decisions Establishing and Applying

the Operational Function Test.

This Court has held that the Due Process and Commerce

Clauses of the Federal Constitution prevent States from taxing

extraterritorial values earned by nondomiciliary corporations.

See ASARCO, Inc. v. Idaho State Tax Comm'n, 458 U.S. 307,

315 (1982); see also Container Corp. of Am. v. Franchise Tax

Bd., 463 U.S. 159, 165-66 (1983). In order to apportion

multistate income earned by a nondomiciliary corporation, there

must be some rational relationship between the “opportunities,

benefits, or protection conferred or afforded by the taxing State,”

and the activities that the State seeks to tax. See F.W.

Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 371-

72 (1982) (quotations omitted); see also Allied-Signal, 504 U.S.

at 772. To exclude income from state tax apportionment, the

taxpayer has “‘the distinct burden of showing hy clear and cogent

evidence that the state tax results in extraterritorial values being

taxed.” Container Corp., 463 U.S. at 164 (punctuation omitted);

see also Allied-Signal, 504 U.S. at 787 (stating that taxpayer

must prove “that the income was eared in the course of

activities unrelated to those carried out in the taxing State”)

(punctuation omitted).

A nondomicilliary business’s multistate income may be

constitutionally apportioned if the multistate operation is run as

a single unitary business or if the asset or transaction a State

seeks to tax served an operational function. See Allied-Signal,

504 U.S. at 783, 787. This latter, operational function test

“focuses on the objective characteristics of the asset’s use and its

relation to the taxpayer and its activities within the taxing State.”

Id. at 785 (citing Container Corp., 463 U.S. at 180 n.19); see

also id. at 787. A State may not constitutionally apportion

income earned by a mere passive investment in another State.

Allied-Signal, 504 U.S. at 788. Unlike a passive investment, an

operational relationship provides the necessary link between the

State and the activity the State seeks to tax sufficient to satisfy

due process and the Commerce Clause. Jd. at 785, 787-88.

In distinguishing between an operationally related asset and

a passive investment, this Court has looked for objective

evidence of management’s role in ensuring the particular asset’s

growth and at the asset’s role in the taxpayer’s business

operations in the taxing State. See id. at 789; Container Corp.,

463 U.S. at 180 n.19; see also 4ASARCO, 458 U.S. at 323. While

recognizing that the distinction is “quite fact sensitive,” Allied-

Signal, 504 U.S. at 785, this Court has provided some

nonexclusive illustrations of multistate business investments that

serve an operational function: 1) income earned on short-term

investments used to provide working capital, see id. at 787-88;

ASARCO, 458 U.S. at 325 n.21; and 2) income on investments

designed to provide a stable supply of a key ingredient, see

Allied-Signal, 504 U.S. at 788 (citing Corn Prods. Refining Co.

v. Comm 'r, 350 U.S. 46, 50-53 (1955)). This Court has also

described one fact pattern where an investment does not serve an

Operational purpose: a passive investment acquired pursuant to

a long-term strategy of corporate acquisitions and divestitures.

Allied-Signal, 504 U.S. at 788.

Again, given the fact-intensive nature of the inquiry, nothing

in Allied-Signal suggests that these examples are exclusive, as

Petitioner implies. See Pet. 12-13, 16, 19. Moreover, neither

Allied-Signal nor prior decisions provide specific criteria to

consider under the operational function test. (A point on which

Petitioner’s amicus, Council on State Taxation, agrees (see

COST Br. at 4-5) but that Petitioner fails to acknowledge.)

Certainly, nothing in Allied-Signal supports Petitioner and its

amicus’s assertion that “the focal point” of the Court’s analysis

is “whether the asset was utilized directly in the selling

company’s business.”” Pet. 12-13, COST Br. at 5. Rather, the

focus of the apportionment inquiry remains the flow of value

between the business units and management’s role in the

business unit’s affairs. See Container Corp., 463 U.S. at 180

n.19; accord Allied-Signal, 504 U.S. at 788.

In deciding whether income is apportionable, this Court has

considered facts such as the degree and exercise of actual control

by the taxpayer over the business asset in question. See, e.g.,

Allied-Signal, 504 U.S. at 788 (noting that 20.6% ownership

interest was not enough even for potential control, which

weighed against apportionment); Container Corp., 463 U.S. at

177 n.16 (noting that potential control is not dispositive but is

relevant to apportionment. determination, distinguishing

Woolworth, 458 U.S. at 362, which held that mere potential to

control business affiliate was not dispositive as to whether

affiliate’s income was apportionable); ASARCO, 458 U.S. at

322-23 (unasserted majority interest weighed against finding that

related businesses were unitary). The source of the business

unit’s financing is also relevant to the apportionment

determination. See Woolworth, 458 U.S. at 366 (fact that each

subsidiary was responsible for obtaining its own financing

> The “utilized directly in the selling company’s business’

standard that Petitioner would impose lends itself to circularity.

Petitioner assumes that it was not in the electronic publishing

or electronic information retrieval business in order to argue

that the facts that the appellate court relied on were irrelevant

and that Lexis/Nexis was not an operational asset of its

business. See Pet. 3-5. Under this Court’s precedent, however,

the facts define the scope of the business; the scope of the

business is not predetermined in a manner that controls which

facts are relevant. See Mobil Oil Co. v. Comm'r of Taxes, 445

U.S. 425, 440-42 (1980); Exxon Corp. v. Wis. Dep't of Revenue,

447 U.S. 207, 223-24 (1980).

weighed against finding that out-of-state affiliate’s income was

apportionable). Public statements of corporate purpose or intent,

on which investors may rely, are also material. See Container

Corp., 463 U.S. at 180 n.19 (noting that evidence of managerial

role in subsidiaries’ business was found in taxpayer’s statements

in annual reports).

As other decisions of the Illinois Appellate Court applying ©

Allied-Signal illustrate, these factors sometimes favor a holding

for the multistate taxpayer. See Home Interiors & Gifts, Inc. v.

Dep't of Revenue, 741 N.E.2d 998, 1004-05 (Ill. App. Ct. 2000)

(relying on financial statements reporting that certain accounts

were “investments” in analyzing whether income was

apportionable); Hercules, Inc. v. Dep’t of Revenue, 753 N.E.2d

418, 426-27 (Ill. App. Ct. 2001) (considering inability to control

joint-venture as factor weighing against finding of operational

relationship). Petitioner does not dispute that Allied-Signal

articulated the operational function standard (Pet. 12, 19), and

cannot dispute that the appellate court expressly applied Allied-

Signal, Pet. App. 11a (stating that “the relevant inquiry under the

operational function test focuses on the ““‘objective

characteristics of the asset’s use and its relation to the taxpayer

and its activities within the taxing State’) (quoting Allied-

Signal, 504 U.S. at 785), just as it did in Hercules and Home

Interiors & Gifts. In this case, the appellate court simply

concluded that, under Allied-Signal, Petitioner did not prove by

clear and cogent evidence that the taxing authority had

overreached the constitutional boundaries.

The appellate court weighed evidence showing the extent of

Petitioner’s actual exercise of control over Lexis/Nexis and its

exercise of discretion to finance and control Lexis/Nexis’s

growth. Pet. App. 12a-i4a. The court also relied on evidence of

Petitioner’s use of Lexis/Nexis to take advantage of net loss

carry forwards that it could not otherwise obtain, as well as

evidence that Petitioner held itself out to financial regulators,

shareholders and potential investors as engaged in the business

of electronic publishing and electronic information retrieval, and

that it considered its trademarks in Lexis/Nexis to be material

business assets. Jd. at 13a. No such evidence was present in

Allied-Signal, or in cases like ASARCO, or Woolworth, where

this Court found that income was not apportionable.

The appellate court’s decision that under these facts —

Petitioner failed to prove by clear and cogent evidence that

Lexis/Nexis was not an operational asset is thus perfectly

consistent with this Court’s holdings. Petitioner and its amici

can only manufacture a conflict by mischaracterizing the

appellate court’s decision. Contrary to Petitioner’s claim (Pet.

13, 15), the court did not rely solely on the fact that Lexis/Nexis

was 100% owned by Petitioner (see Pet. App. 12a-13a) (reciting

evidence used to conclude that Petitioner failed to meet its

burden of proof). Nor are ownership percentages immaterial, as

amicus COST claims. COST Br. at 6. In Woolworth, this Court

held only that the potential for control was not dispositive, see

468 U.S. at 362, and in Container Corp. this Court clarified that

such evidence was indeed relevant, see 463 U.S. at 177 n.16.

Nor was it improper for the appellate court to consider

Petitioner’s 10-K filings and the manner in which Petitioner held

itself out to the public, investors and government regulators. See

id. at 180 n.19 (evidence of management’s role taken from

annual reports). Amicus Gannett provides an extended

discussion of what it means to include a company as a business

segment on a 10-K statement, arguing that such inclusion is

governed by independent Financial Accounting Standard No.

131. Gannett Br. at 6-7. Petitioner had every opportunity to

make this argument before the appellate court but failed to do so,

meaning that this line of argument is forfeited.* See Illinois v.

McArthur, 531 U.S. 326, 334-35 (2001). Moreover, nothing in

amicus Gannett’s discussion suggests that Petitioner ’s choice

between characterizing Lexis/Nexis on its 10-K statement as a

business segment rather than as an investment, or its treatment

of Lexis/Nexis trademarks as material to its business was

meaningless. (At a minimum, potential investors should be able

to rely on the fact that when a public corporation states that it is

in-the electronic publishing business, it means what it says.)

Gannett’s real objection is to the manner in which the appellate

court weighed this evidence.

Amicus Gannett also mischaracterizes the record in arguing

that Petitioner’s nightly cash sweep amounted to a “constructive

dividend” of Lexis/Nexis’s earnings, which cannot be used as a

basis for apportionment without undermining the “‘unitary-

business limitation.’” Gannett Br. at 6 (quoting Woolworth, 458

U.S. at 364 n.11). From December 1993 through Lexis/Nexis’s

1994 sale, it was Petitioner’s division, not its corporate

subsidiary—and the 1994 sale was an asset sale, not a stock sale.

Pet. App. 3a-4a. It is difficult to see how, and Gannett has cited

no authority that, a cash sweep of a corporate division’s earnings

can be construed as a dividend, constructive or otherwise.

Further, when Lexis/Nexis was a corporate subsidiary, the

cash yielded nightly from the sweep of Lexis/Nexis’s bank

accounts was invested for Lexis/Nexis’s benefit, but at

Petitioner’s direction. Jd. at 3a. Thus, on this record, Gannett’s

* The appellate court noted that Petitioner failed to provide

“relevant legal authority” to support its argument that the trial

court improperly considered the annual reports and 10-K

statements. Pet. App. 13a. Petitioner therefore forfeited these

arguments as a matter of Illinois law. See People v. Ward, 215

Ill. 2d 317, 332 (2005); Ill. Sup. Ct. Rule 341(h)(7).

contention that funds were commingled and that the cash sweep

amounted to a constructive dividend is, at best, raw speculation.

See, e.g., Mills v. Internal Revenue Serv., 840 F.2d 229, 235 (4th

Cir. 1988) (holding that payments between corporate entities are

constructive dividends only if there is a direct benefit to the

shareholder above and beyond its interest in the corporation).

Moreover, from Gannett’s description, its own cash management

system, in which funds from various business units apparently

are commingled, appears distinct from Petitioner’s cash sweeps

described in the record. Gannett Br. at 5 n.2. How Gannett’s

particular cash management system impacts its state-court

litigation can thus only be imagined under its present account of

the facts. In any case, Petitioner did not make this “constructive

dividend” argument to the appellate court, or introduce any facts

to prove it, and the argument should not be raised now by an

amicus. See McArthur, 531 U.S. at 334-35 (arguments not made

below are waived); see also Container Corp., 463 U.S. at 164 (it

is taxpayer’s burden to prove by clear and cogent evidence that

extraterritorial values are being taxed).

Petitioner and amicus’s attempt to diminish the tax benefits

Petitioner realized through its manipulation of Lexis/Nexis’s

business form is another improper post hoc attempt to reweigh

the evidence. Pet. 14; COST Br. at 7. Petitioner was not using

Lexis/Nexis simply for vague “tax advantages” but for the

concrete benefit of claiming net loss carry forwards, which

would otherwise expire. Cf Jn re Envirodyne Indus., 354 F.3d

646 (7th Cir. 2004) (Posner, J.) (rejecting taxpayer’s attempt to

unitize corporate subsidiaries through common parent in order

to apply losses incurred by one line of subsidiaries to unrelated

profitable subsidiaries).

In the end, Petitioner and amici are complaining about how

the appellate court weighed the facts and applied the facts to the

legal standard. See, e.g., COST Br. at 4 (“It is the application of

this standard that should determine the outcome of this case.”’).

Indeed, the heart of amicus COST’s brief is devoted to

reweighing the facts on which the appellate court relied. See,

e.g., COST Br. at 6-8 (noting that “[s]trategic planning about

asset holdings . . . supports a conclusion” that the asset is an

investment,” and “100% ownership of a subsidiary . . .. may be

for operational synergy; others serve strictly [as] an investment

purchase.”). Contesting how the state appellate court weighed

the facts and applied the settled law to them does not create a

conflict or inconsistency with this Court’s decision in Allied-

Signal or any other of this Court’s decisions.’ Further review by

this Court is unwarranted.

> Amicus COST’s general complaint that the appellate court’s

reasoning will subject its members to multiple and

discriminatory taxation on investments (id. at 2, 9) misses the

mark. Whether income is subject to multiple or discriminatory

taxation is a function of the fairness of the apportionment

formula, not the fact of income apportionment. See Container

Corp., 463 U.S. at 169-71. States have wide latitude in their

selection of apportionment formulas, see Moorman Mfg. Co.

v. Bair, 437 U.S. 267, 274 (1978), and the type of three-factor

formula used by Illinois during the 1994 tax year, see 35 ILCS

5/304(a) (1994), is “something of a benchmark against which

other apportionment formulas are judged,” Container Corp.,

463.U.S. at 170. Moreover, while Petitioner did argue in the

appellate court that the inclusion of Lexis/Nexis’s gain in

Illinois’ apportionment formula unconstitutionally distorted the

amount of income attributable to Illinois (see Pet. App. 17a-

18a), it did not raise this contention in its Question Presented

(see Pet. i).

II. The Decision of the Intermediate Appellate Court in this

Case Does Not Conflict with Decisions of Other States’

High Courts.

Petitioner has not identified any direct conflict with other

States’ high court decisions. Like this Court in Allied-Signal,

504 U.S. at 785, other state courts have noted that the

operational function test is fact-intensive, see Alaska Dep't of

Revenue v. OSG Bulk Ships, Inc., 961 P.2d 399, 413 (Alaska

1998); see also Citicorp N. Am., Inc. v. Franchise Tax Bd., Inc.,

100 Cal. Rptr. 2d 509, 532 (Ct. App. 2000) (taxpayer failed to

produce evidence that out-of-state real estate rental income was

unrelated to in-state business). And other state courts have

applied criteria similar to those on which the Illinois Appellate

Court relied.

In Hoechst Celanese Corp. v. Franchise Tax Bd., 22 P.3d

324, 328-30 (Cal.), cert. denied, 534 U.S. 1040 (2001), the

California Supreme Court found that a gain realized from the

partial reversion of the taxpayer’s pension trust fund was

operational income, despite the fact that the taxpayer did not

hold legal title to trust fund assets. The income was

apportionable under the operational function test because the

taxpayer funded the plan with apportionable business income,

managed the plan by choosing its management and guiding its

overall investment strategy, and because the plan made better use

of the taxpayer’s employees, a business-related resource. See 22

P.3d at 344-45. The Hoechst Celanese court thus relied on many

of the same facts that the Illinois Appellate Court did—capital

support, investment oversight and control—in reaching its

conclusion that the trust fund was the taxpayer’s operational

asset. See id. at 345. There is no conflict between the present

case and Hoechst Celanese, as Petitioner suggests. Pet. 21-22.

In Citicorp N. Am., 100 Cal. Rptr. 2d at 531-32, the

California Court of Appeal held that a banking and financial

services conglomerate’s gain from the sale of out-of-state office

property that generated business income from rentals to

unrelated third parties was constitutionally apportionable under

the operational function test. The court noted that the taxpayer

failed to produce evidence that its real estate holdings were

divorced from its financial services business. /d. As in Hoechst

Celanese, this Court denied the certiorari petition. See Citicorp

North Am., Inc. v. Franchise Tax Bd., 533 U.S. 963 (2001).

Like the rental income in Citicorp N. Am., Lexis/Nexis’s

income contributed to and was treated as Petitioner’s business

income prior to its sale. And like the taxpayer in Citicorp N.

Am., Petitioner has not proven that Lexis/Nexis had nothing to

do with Petitioner’s activities in Illinois. These two cases do not

conflict. Cf Jim Beam Brands Co. v. Franchise Tax Bd., 34 Cal.

Rptr. 3d 874, 878-82 (Ct. App. 2005) (holding that gain realized

from liquidating sale of subsidiary that contributed to production

of business income was also apportionable business income

under state law).

Nor does OSG Bulk Ships conflict with the present case, as

Petitioner also contends, Pet. 21. That case did not involve the

sale of a corporate asset. Rather, the parties stipulated that the

income in question was investment income. The issue on appeal

was whether that investment income could be apportioned if it

did not contribute to working capital. The Alaska Supreme

Court held that for investment income to be “operational” it had

to contribute to working capital. 961 P.2d at 412-14. In short,

that case involved the treatment of investment income

specifically, and nothing in the decision foreclosed apportioning

the gain from the sale of a business asset, as the Illinois

Appellate Court did here.

Pennzoil Co. v. Dep't of Revenue, 33 P.3d 314, 318 (Or.

2001), cert. denied, 535 U.S. 927 (2002), also did not involve a

capital transaction directly. There, the Oregon Supreme Court

held that the State could tax a portion of an oil company’s

settlement proceeds from a lawsuit arising out of the failed

acquisition of another oil company. The court held that because

the target of the acquisition owned significant oil reserves, and

those reserves were important to the taxpayer’s in-state business,

the proceeds qualified as operational income under the Corn

Products doctrine, recognized by this Court in Allied-Signal, 504

U.S. at 788. But that case does not limit the operational function

test to Corn Products-type fact-patterns, as Petitioner suggests.

Pet. 21-22. In fact, the Oregon Supreme Court applied the Corn

Products doctrine quite broadly, citing no evidence that potential

oil reserves were necessary to supply the in-state motor-oil

blending business.

Nor do the series of Hercules cases that Petitioner cites

conflict with the present case. See Pet. 19-20 (citing Hercules,

Inc. v. Comptroller of Treasury, 716 A.2d 276 (Md. 1998);

Hercules, Inc. v. Comm'r of Revenue, 575 N.W.2d 111 (Minn.

1998)). As the Illinois Appellate Court’s own Hercules decision

illustrates, these decisions provide an appropriate counterpoint

to the present case, for they applied many of the same factors

that the Illinois Appellate Court applied here. See Hercules v.

Dep't of Revenue, 753 N.E.2d 418 (Ill. App. Ct. 2001).

In Hercules, the taxpayer spun off a former division into an

independent joint-venture company—one in which the taxpayer

did not hold a majority interest, that it could not control, had no

operational ties to, and dealt with at arm’s length. 753 N.E.2d

at 426-28. Not only did the Minnesota and Maryland high courts

agree that under this set of facts the State could not apportion the

gain from the sale of the business asset, Hercules, Inc. 575

N.W.2d at 116-17; Hercules, Inc., 716 A.2d at 112-15, but so did

the Illinois Appellate Court, 753 N.E.2d at 430. The instant case

does not conflict with these decisions. It is the result of applying

the same legal standard to a different set of facts.

This Court has accorded great flexibility to the States in

deciding the question of the constitutional apportionability of

income. The taxpayer’s burden to show that its constitutional

rights were infringed “is never met merely by showing a fair

difference of opinion,” and this Court will not “re-examine, as a

court of first instance, findings of fact supported by substantial

evidence.” Container Corp., 463 U.S. at 175-76 (emphasis in

original). As a result, this Court expects that different factual

circumstances will lead to different results. Allied-Signal, 504

USS. at 785.

As the above discussion of the case law illustrates, this

Court’s expectation has been realized. The Illinois Appellate

Court and other state courts have ably applied Allied-Signal and

reached different results in different factual circumstances. In

applying the Allied-Signal standard, the Illinois Appellate Court

and other state courts have correctly examined the “objective

characteristics of the income-producing asset’s use and its

relation to the taxpayer and its activities in the taxing state,”

Hoechst Celanese, 22 P. 2d at 345 (quoting Allied-Signal, 504

U.S. at 785) (punctuation omitted); (Pet. App. 1 1a), to determine

whether the necessary “minimum connection exists between the

taxing state and the corporation’s business activities,” (Pet. App.

10a) (citing Allied-Signal, 504 U.S. at 772), or whether the

income instead was earned in the course of unrelated activities,

see Pennzoil, 33 P.3d at 318 (citing Allied-Signal, 504 U.S. at

787).

In the end, all that Petitioner and amici can muster is a

complaint that in this case the appellate court did not properly

weigh the evidence and misapplied that evidence to this Court’s

legal standard. But such a contention does not mean that the

appellate court’s decision cuts loose the apportionment

principles from any limitations. See COST Br. at 5. Anda

disagreement with the Illinois Appellate Court’s application of

the facts to the law does not provide a basis for this Court’s

review.

CONCLUSION

The petition for writ of certiorari should be denied.

Respectfully submitted,