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

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vol? /2- 2- 07

In The

Supreme Court of the United States

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MEADWESTVACO CORPORATION, SUCCESSOR

IN INTEREST TO THE MEAD CORPORATION,

Petitioner,

Vv.

ILLINOIS DEPARTMENT OF REVENUE, DIRECTOR

OF THE ILLINOIS DEPARTMENT OF REVENUE,

AND TREASURER OF THE STATE OF ILLINOIS,

Respondents.

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On Writ Of Certiorari To The

Appellate Court Of Illinois

,

4

REPLY BRIEF OF PETITIONER

°

PAUL H. FRANKEL

BETH S. BRINKMANN Counsel of Record

BRIAN R. MATSUI CRAIG B. FIELDS

NicoLe D. DEVERO ROBERTA MOSELEY NERO

MORRISON & FOERSTER LLP MORRISON & FOERSTER LLP

2000 Pennsylvania Ave.,N.W. 1290 Avenue of the Americas

Washington, DC 20006 New York, NY 10104

(202) 887-1544 (212) 468-8000

Counsel for Petitioner

DECEMBER 28, 2007

COCKLE LAW BRIEF PRINTING CO (300) 225-6964

OR CALL COLLECT (402) 342 2331

i

TABLE OF CONTENTS

TABLE OF AUTHORITIES ..................c.sccsssseesseees

REPLY BRIEF OF PETITIONER ........................

I.

Il.

III.

RESPONDENTS DEFENSE OF THE STATE

CourRT’s OPERATIONAL FUNCTION TEST IS

a

A.

B.

Respondents’ Argument Is Contrary To

i ictepitinsinnissiisindddneiacsdsstensstasnis

Respondents Cannot Prevail Based On

The Standard Of Review Because The

State Court Applied The Wrong Legal

Standard For Operational Function.....

Respondents Improperly Conflate The

Operational Function Test And The

Unitary Business Test...........................

RESPONDENTS CHALLENGE TO THE TRIAL

CourT’s UNITARY BUSINESS RULING FAILS....

A.

B.

The Trial Court Correctly Concluded

That There Was No Unitary Business

Relationship Between Mead And Lexis/

ee ascicabshdisintlbethacsthdastbcieccdesdicdecitiedhlushdaiitinceiguin

Respondents Misconstrue The Container

8 ae

RESPONDENTS WAIVED THEIR MERITLESS

ARGUMENT THAT THE RELATIONSHIP BETWEEN

LExiS/NExIS AND ILLINOIS ALLOWS RESPONDENTS

To Tax MEAD’S CAPITAL GAIN..................0000.

13

13

16

il

TABLE OF CONTENTS - Continued

Page

A. Respondents Failed To Preserve This

Argument In The State Appellate

STITT ssscchipinthinsachilcitecnenidteiseeanidiinciginibaibiiniitines 22

B. This Argument Raises Issues That

Could Affect Other States Who Were

Not On Notice Of The Argument From

The Certiorari-Stage Briefing............... 23

C. Reliance On An _Investment’s

Relationship With The Taxing State To

Tax An Investor Cannot Be Squared

With This Court’s Precedents ............... 25

IV. A RULING IN RESPONDENTS’ FAVOR WOULD

UPSET SETTLED EXPECTATIONS AND CREATE

A Risk OF DUPLICATIVE TAXATION................. 29

IIIT sscncccnconsecciansiesssopcensicesdeeniinmuiadereieian 32

ili

TABLE OF AUTHORITIES

Page

CASES

Adams Express Co. v. Ohio State Auditor, 165

is ict acateninhleniatandpininathateilaena 13, 26

Alaska Department of Revenue v. OSG Bulk

Ships, Inc., 961 P.2d 399 (Alaska 1998)........... 11, 30

Allied-Signal, Inc. v. Director, Division of

Taxation, 504 U.S. 768 (1992) .......... ee passim

In re Allied-Signal, Inc. , 645 N.Y.S.2d 895 (N.Y.

App. Div.), appeal dismissed, 675 N.E.2d

PEE TEI chicsincciniatunntinteisetindeeeinéotaseigiietenl 24, 25

ASARCO Ince. v. Idaho State Tax Commission,

eee 3, 12, 14

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

Commission, 266 U.S. 271 (1924)............0000000.020. 13

Container Corp. of America v. Franchise Tax

Board, 463 U.S. 159 (1983)........ biveinabeeedibeiniptens passim

Elementary School District 159 v. Schiller, 849

I I tr dcitiieniircecsininicaientenniiatdoninsvcctend 22

Exxon Corp. v. Wisconsin Department of

Revenue, 447 U.S. 207 (1980) ......................0000- 12,19

FW. Woolworth Co. v. Taxation & Revenue

Department, 458 U.S. 354 (1982) ........... 6, 12, 19, 21

Glover v. United States, 531 U.S. 198 (2001)............. 23

Heckler v. Campbell, 461 U.S. 458 (1983) ................. 23

iv

TABLE OF AUTHORITIES — Continued

Page

Hercules Inc. v. Commissioner of Revenue, 575

ESE ES GNI: TUUED sccuvesescnsuvsscninscestvennsnsvensoed 30

Hercules Inc. v. Comptroller of Treasury, 716

ee Se detesinptutninistctestinheasitesaninnaidiertuisied 30

Hoechst Celanese Corp. v. Franchise Tax Board,

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

Sea isiscondciahissiatihinitmeeiianisladdusapinbotintiestitialncaduaitianininns 11, 30

Illinois v. Gates, 462 U.S. 213 (1983)... 24

International Harvester Co. v. Wisconsin

Department of Taxation, 322 U.S. 435 (1944) ....27, 28

Kemppel v. Zaino, 746 N.E.2d 1073 (Ohio 2001)....... 31

Kewanee Industries, Inc. v. New Mexico, 845

SE ETE Mi cnscrtnsnsinctiniphinedepiabsacceneheneetiiecsi 8

Lorillard Tobacco Co. v. Reilly, 533 U.S. 525

TT ic.thiessiianihichiadinsieidetiaibancianatiamabamasiphedtintaeatbinpiiécendvnneds 23

McGoldrick v. Compagnie Generale

Transatlantique, 309 U.S. 430 (1940) ........... 23

Mobil Oil Corp. v. Commissioner of Taxes of

Vermont, 445 U.S. 425 (1980)............ 8, 14, 19, 21, 31

Norton Co. v. Department of Revenue, 340 U.S.

SETI shschassiistianli daieshiadieabaiiaabinanbuntbiiipaiabiegdcsaeasbied 5,14

Pennzoil Co. v. Department of Revenue, 33 P.3d

314 (Or. 2001), cert. denied, 535 U.S. 927

SESE iiichsiidinasiilidabindeaiabadashlepieaiuaselibiademsbuiaindaeibseees 11

Roberts v. Galen of Virginia, Inc., 525 U.S. 249

Vv

TABLE OF AUTHORITIES — Continued

Page

State Railroad Tax Cases v. Kidder, 92 U.S.

Ue wicepicinatintseiicepsontnidiiorsdasadiininndendecmaniatel 12,13

Underwood Typewriter Co. v. Chamberlain, 254

Se ee icntinatuiciniicciecaiigiliaiiaitbdhaedaibidbaidaibiaiehdees 13

Wisconsin v. J.C. Penney Co., 311 U.S. 435

EN ciccutoiscinccensadnevennidbadeineietusiatvitetasainiiaiiiees 27, 28

STATUTES AND RULES

35 Ill. Comp. Stat. Ann. 5/303(a) (West 1994)........... 24

35 Ill. Comp. Stat. Ann. 5/303(b)(3) (West 1994).......24

35 Ill. Comp. Stat. Ann. 5/304(a) (West 1994)........... 24

N.Y. Tax Law § 210(3)(b) (Consol. 2007)...............04. 24

So ets Sie TITY sonichkcdudivcabasasisinishessientinchianpibiiesenibebiabesuasdannital 25

Be ee i Ss MIIIETED ccsevosciscrecensstecnnpsinnibaiendadsiasesintill 22

aa aes ns, Seis Ge aciseiscceiscihccccincidebicccbiimsiiisiaensatedanabiinadanianid 22

MISCELLANEOUS

Jerome R. Hellerstein & Walter Hellerstein,

State Taxation (3d ed. 2007) ...........cccccccccceeeeeeeceeeeee 24

1

REPLY BRIEF OF PETITIONER

Mead paid taxes to Illinois, as a nondomiciliary

corporation, based on the amount of Mead’s income

that was apportioned to its business conducted

in Illinois. That taxation was based on the

well-established proposition that a State can tax a

corporation on its income attributable to business

conducted within the taxing State. But respondents

also required Mead to pay taxes based on a capital

gain that was not apportionable to Illinois.

Respondents urge this Court to expand the reach

of Illinois’s tax authority and allow Illinois to include

in Mead’s apportionable tax base the capital gain

derived by Mead from its out-of-state sale of its

Lexis/Nexis investment. That capital gain, however,

was earned by Mead in the course of activities

unrelated to Mead’s business conducted in Illinois. It

was extraterritorial income not fairly attributed to

the activities of the taxpayer Mead within the State.

It was not income in the regular course of Mead’s

unitary business in Illinois, nor did it serve an

operational function for that business.

This Court’s precedents make clear that

respondents cannot expand the reach of Illinois’s

taxing authority, consistent with the Due Process and

Commerce Clauses, in such circumstances to allow

the State to tax a nondomiciliary investor for a

portion of a capital gain derived from the sale of a

nonunitary investment.

2

I. RESPONDENTS’ DEFENSE Or THE STATE

Court’s OPERATIONAL FUNCTION TeEsT Is

MERITLESS

The sole justification of the state courts below for

allowing Illinois to include in Mead’s apportionable

tax base the capital gain earned by Mead on the

sale of Lexis/Nexis was that Mead’s investment in

Lexis/Nexis somehow served an operational function

for Mead’s paper and office supply business. But

respondents devote only a small fraction of their brief

to an attempt to defend that ruling. They rely on the

single fact that Mead owned Lexis/Nexis and expected a

return on that investment. That rationale does not

meet the constitutional standard for operational

function under Allied-Signal, Inc. v. Director, Division

of Taxation, 504 U.S. 768 (1992).

A. Respondents’ Argument Is Contrary To

Allied-Signal

Respondents are wrong that the state

apportionment method of taxation is constitutional

whenever the taxpayer corporation exerts some

control over a nonunitary asset that produces

out-of-state income or gain. Resp. Br. 40-45.

This Court has held that, unless there is a

unitary business relationship between a taxpayer

corporation and an asset in an out-of-state capital

transaction, a State may tax an apportionment of the

3

gain derived from the asset only if that “capital

transaction serve[s] an operational rather than an

investment function” for the taxpayer’s business

conducted in the State. Allied-Signal, 504 US. at

787. In other words, the operational function test

allows Illinois to tax an apportionment of Mead’s

capital gain on its sale of its Lexis/Nexis electronic

data retrieval investment only if Lexis/Nexis was

somehow used by Mead to serve an operational

function for Mead’s paper and office supply business

conducted in Illinois. In the absence of such an

operational relationship, the constitutionally required

minimum connections between the State and the

taxpayer's gain are not satisfied.

It is not enough that Mead’s ownership

of Lexis/Nexis affected Mead’s balance sheet.

Allied-Signal specifically cautioned that “the mere

fact that an intangible asset was acquired pursuant to

a long-term corporate strategy of acquisitions and

dispositions does not convert an otherwise passive

investment into an integral operational one.” Jbid.

And, a nonunitary asset does not become integral to

the operations of a unitary business merely because

that asset is “‘acquired, managed or disposed of for

purposes relating or contributing to the taxpayer’s

business.’” Jd. at 789 (quoting ASARCO Inc. v. Idaho

State Tax Comm’n, 458 U.S. 307, 326 (1982)).

The Allied-Signal Court emphasized why this is

so: “The business of a corporation requires that it

earn money to continue operations and to provide a

return on its invested capital. Consequently all of its

4

operations, including any investment made, in some

sense can be said to be ‘for purposes related to or

contributing to the [corporation’s! business.’” Jbid. The

Court unequivocally rejected that unlimited concept as

satisfying the constitutional standard. Ibid.

B. Respondents Cannot Prevail Based On

The Standard Of Review Because The

State Court Applied The Wrong Legal

Standard For Operational Function

1. Respondents argue that the judgment below

should be affirmed because the standard of review

that this Court applies requires deference to state

courts. Resp. Br. 40.'

No deference to a _ state court ruling is

appropriate, however, where, as here, the court

applied the wrong legal standard. This Court has

made clear that first its “task must be to determine

' Certain of respondents’ amici also suggest that Mead’s

arguments before this Court shift the burden of proof to Illinois

to prove its tax is constitutional. Br. of California et al. as Amici

Curiae Supporting Respondents 28-30. Mead makes no such

argument. Under the applicable standard, Mead has the burden

of proof to demonstrate that the state tax was unconstitutional.

But, as diseussed in Mead’s opening brief and in this reply, Mead

fully met this burden through undisputed evidence. J.A. 10-13.

It thus is incumbent upon respondents to rebut Mead’s proffer or

have its tax found unconstitutional.

5

whether the state court applied the correct standards

to the case,” and then, only if the state court did so, it

must determine whether the state court’s “judgment

‘was within the realm of permissible judgment.’”

Container Corp. of Am. v. Franchise Tax Bd., 463 U.S.

159, 176 (1983) (quoting Norton Co. v. Department of

Revenue, 340 U.S. 534, 538 (1951)). Thus, absent

application of the correct legal standard by the court

below, this Court does not owe deference to the state

court judgment.

That is so here. The Illinois appellate court's

judgment on operational function does not merit

deference because that court applied the wrong legal

standard. The court employed an ad hoc approach

that cited some connections between the two

businesses and some benefits they shared. The court

rested its operational function ruling simply on

Mead’s ownership of Lexis/Nexis, Mead’s occasional

“involvement with Lexis/Nexis,” and basic indicia of

ownership. Pet. App. 12a-13a.

But the correct legal standard for operational

function under Allied-Signal does not rest on such

facts. Allied-Signal requires that a court look to

whether Lexis/Nexis provided integral support to the

operations of Mead’s paper and office supply business

conducted in Illinois. 504 U.S. at 789. And, as

Mead’s opening brief explains, the facts regarding the

relationship between Mead’s paper and office supply

business and its Lexis/Nexis investment do not

satisfy that test. Pet. Br. 30-41.

6

2. Respondents attempt to distinguish

Allied-Signal on the ground that the taxpayer in that

case “owned only 20.6% of its investee’s stock and had

no way to control the investee.” Resp. Br. 44. But that

fact was not relevant to the operational function

inquiry in Allied-Signal. Rather, the Court cited the

fact to support its conclusion that the taxpayer’s

minority stake in the investment meant that there

was no possibility of “an integrated division of a single

unitary business.” Allied-Signal, 504 U.S. at 788. And

even in the context of a unitary business relationship,

this Court made clear that “potential control is not

sufficient.” Ibid. (citing F W. Woolworth Co. v. Taxation

& Revenue Dep't, 458 U.S. 354, 362 (1982)).’

3. Respondents also contend that the extent of

its taxation of Mead can be justified because, they

claim, “Mead regularly manipulated Lexis/Nexis’s

corporate form” to gain tax benefits. Resp. Br. 41.

That post hoc justification based on corporate form is

wrong for three reasons.

First, respondents’ statement is belied by the

facts to which respondents agreed through stipulation.

* In Woolworth, for example, this Court invalidated an

application of a state tax apportionment scheme even though

three of the four subsidiaries the State sought to tax were 100%

owned by the taxpaying parent. Woolworth, 458 U.S. at 356-357.

Accordingly, not only does petitioner’s 100% ownership have no

relevance to the operational function test, it also is of limited

probative value to the unitary business determination.

7

The stipulated record establishes that, in the

twenty-six years during which Mead owned

Lexis/Nexis, such a change occurred on only three

occasions. J.A. 14. Far from demonstrating any

“regular[]” manipulation of corporate form, those

infrequent occurrences do not indicate’ that

Lexis/Nexis somehow operationally supported Mead’s

paper and office supply business.”

Second, respondents’ argument that the change

in the corporate form of Lexis/Nexis was not “arm’s

length” (Resp. Br. 41) is nonsensical. Mead owned a

100% interest in Lexis/Nexis both before and after

the change in corporate form. Moreover, the record

does not support respondents’ implication that there

was a sale of Lexis/Nexis for $350,000; rather the

record indicates that was the cost of effecting the

corporate change. J.A. 147. The change in corporate

form had no substantive effect on the operations at

Lexis/Nexis vis-a-vis Mead. J.A. 165, 176-177.

Third, this Court has never placed significance

on the corporate form of an asset but, instead, has

focused on the activity of the asset to determine

whether it served an operational function for the

* Respondents’ reliance on this fact also is undermined

by their own insistence, starting in 1988, that Mead and

Lexis/Nexis file consolidated tax returns in Illinois as a unitary

business, which Mead did under protest. J.A. 13. Accordingly,

the 1993 change in corporate form had no effect on Mead’s taxes

in Illinois, because Mead already was filing in that manner at

the insistence of Illinois.

8

entity being taxed. Cf Mobil Oil Corp. v.

Commissioner of Taxes of Vermont, 445 U.S. 425, 440

(1980) (“the underlying activity, not *** the form

of investment *** determinels] the propriety of

apportionability”). Respondents elsewhere concede as

much. See Resp. Br. 43 (“Apportionment has nothing

to do with the form a business organization takes.”).

Respondents’ amici make a somewhat similar

argument, contending that Illinois can apportion to

itself for taxing purposes part of the gain Mead

received from the sale of Lexis/Nexis because the

change in the form of Lexis/Nexis had “the purpose of

setting off against the gains of one part of the

business the losses incurred by another part.” Br. of

California et al. as Amici Curiae Supporting

Respondents 31.‘ Their argument would eviscerate

the operational function test. It would mean, as a

practical matter, that a State would be entitled to

increase its tax on a nondomiciliary corporation

conducting a business in the State to include a

variety of transactions involving the corporation’s

investments located in other States. That would be so

whenever the corporation realized a tax benefit from

its ownership of such out-of-state subsidiaries and

* Neither Illinois nor its amici cite any case to support their

extraordinary proposition that tax benefits that affect only a

multistate corporation’s balance sheet can serve an operational

function. Our research has located only one case addressing that

issue and it did so in the context of state law. See Kewanee

Indus., Inc. v. New Mexico, 845 P.2d 1238 (N.M. 1993).

9

divisions even though those investments were not

otherwise related to the corporation’s unitary business

conducted in the State. The practical and unsettling

effect of such a result is explained in detail by amicus

curiae in support of Mead’s opening brief. See Br.

of The Walt Disney Company as Amicus Curiae

Supporting Petitioner 22-26; see also Pet. Br. 43-50.

C. Respondents Improperly Conflate The

Operational Function Test And The

Unitary Business Test

Respondents and their amici States confuse this

Court’s precedents when they claim that the

operational function test is not distinct from the

unitary business test, and is a mere component of the

latter test. Resp. Br. 43-44; Br. of California et al. as

Amici Curiae Supporting Respondents 14-21.

Significantly, this is a distinction without a

difference, because such mislabeling cannot alter the

fact that the state tax here fails under either

approach. See pages 13-21 infra (unitary business);

Pet. Br. 21-28 (same); see pages 4-9 supra (operational

function); Pet. Br. 28-41 (same).

In any event, respondents’ effort to blur the

distinction between the two tests is misleading

because, irrespective of whether the two tests are

independent of one another or are components of a

larger analysis, they each are distinct in that they

measure in different ways the relationship between

the taxpayer and the asset or investment that the

10

State seeks to tax. The unitary business test

examines whether an asset is an integrated part of

the taxpayer’s business. The operational function test

examines whether an asset that is not integrated

with the taxpayer’s business nonetheless provides

integral operational support to the business.

By conflating the two tests, respondents seek to

satisfy the operational function test based on

evidence that shows no more than some economic

connection between two businesses under common

ownership. That evidence does not, as demonstrated

above, meet the operational function test and,

although it is probative it is not sufficient under the

unitary business test.’ Respondents appear to imply

(Resp. Br. 44) that because, in their view, the

two tests are not mutually exclusive, evidence of

partial satisfaction of both tests can satisfy the

constitutional standard, but that is clearly contrary

to Allied-Signal.

Other than the court below, state courts have

universally recognized that the operational function

test is not satisfied merely because a nonunitary

* We do not suggest that evidence probative of a unitary

business relationship could not also be probative of an

operational function. For example, it might be probative to both

inquiries if the record demonstrated that the two businesses

were in the same line of business. But what respondents ignore

is that such evidence would be probative to both tests for

different reasons, because of the different analyses each test

employs.

11

asset contributes to a taxpayer’s “financial strength

overall,” because to do so “would swallow the

distinction between operational and investment

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

Inc. , 961 P.2d 399, 411, 414 (Alaska 1998). State court

decisions sustaining state apportionment under

the operational function test share no similarities

to the instant case. Pennzoil Co. v. Department

of Revenue, 33 P.3d 314, 318 (Or. 2001), cert. denied,

535 U.S. 927 (2002) (agreement guaranteeing

strategic petroleum resources for taxpayer petroleum

business constitutes an operational function); Hoechst

Celanese Corp. v. Franchise Tax Bd., 22 P.3d 324, 345

(Cal.), cert. denied, 534 U.S. 1040 (2001) (trust and

pension plan served an operational function because

it was designed “to induce [the taxpayer’s] current

employees to stay and to attract new employees”).

Taxation of the nonunitary asset’s income or gain is

justified in those cases because the income or value

derived therefrom is used in an ongoing, integral

operational capacity by the taxpayer’s unitary

business conducted in the taxing state.

* Allied-Signal and state courts applying the operational

function test also rebut respondents’ claim (Resp. Br. 44) that

the “flow of benefits” from Mead to Lexis/Nexis is relevant

to the test. None of those cases describe a circumstance

in which the operational function test would be satisfied due to

a taxpayer’s support of its nonunitary asset. Thus, it is

respondents’ argument that “finds no support in the caselaw.”

Ibid.

12

Respondents are wrong to challenge the fact that

the operational function test is a narrow exception to

the unitary business principle’s limit on State

taxation of out-of-state income. Resp. Br. 41-42.

The narrow scope of the operational function test is

demonstrated by the very limited circumstances in

which it can sustain a state tax apportionment

scheme. As _ Illinois concedes, this Court in

Allied-Signal proffered just two examples: “interest

on short-term deposits in out-of-state banks, where

the interest is used as working capital”; and an

investment “which ensured a supply of a producer’s

key ingredient.” Resp. Br. 42.’

" It was not until 1992, in Allied-Signal, that the Court

applied, for its first and only time, the operational function test.

The Court in Container Corporation of America v. Franchise Tax

Board had articulated, but had not applied, the operational

function test by citing an example where it might be satisfied

based upon a case arising “in another context.” 463 U.S. 159,

180 n.19 (1983). Other cases from that era challenging state tax

apportionment methods were all resolved based on whether a

unitary business relationship existed. See ASARCO, 458 U.S.

307; Exxon Corp. v. Wisconsin Dep't of Revenue, 447 U.S. 207

(1980); Woolworth, 458 U.S. 354.

By contrast, this Court first set forth the unitary business

test more than one hundred years ago. The Court allowed States

to treat railroads that traversed several jurisdictions “as a unit”

for tax purposes and then to apportion the value of that

multistate “unit” to individual States. State R.R. Tax Cases v.

Kidder, 92 U.S. 575, 608 (1875). This was so because the various

components of the railroad present in each jurisdiction did not,

in isolation, possess significant value. It was only by allowing

States to consider the components in the various jurisdictions in

the aggregate that the true value of the railroad as a whole

(Continued on following page)

13

II. RESPONDENTS’ CHALLENGE To THE TRIAL

Court’s UNITARY BUSINESS RULING FAILS

A. The Trial Court Correctly Concluded

That There Was No Unitary Business

Relationship Between Mead And

Lexis/Nexis

Respondents argue that the trial court erred

when it ruled that there was no unitary relationship

between Mead and Lexis/Nexis. Resp. Br. 34-40.

Although the Illinois appellate court declined to reach

the issue, Pet. App. lla, the trial court thoroughly

examined the question and unequivocally and

correctly resolved it in Mead’s favor, Pet. App. 39a.”

As already noted above, and as _ Illinois

acknowledges (Resp. Br. 40), this Court “will, if

could be discerned and a State could tax a fairly apportioned

part of it. /bid.; Adams Express Co. v. Ohio State Auditor,

165 U.S. 194 (1897); see also Underwood Typewriter Co. v.

Chamberlain, 254 U.S. 113, 120 (1920) (upholding against

constitutional challenge state apportionment method because

“the profits of the corporation were largely earned by a series of

transactions beginning with manufacture in Connecticut and

ending with sales in other states”); Bass, Ratcliff & Gretton, Ltd.

v. State Tax Comm'n, 266 U.S. 271, 282 (1924) (same).

* This issue is not a necessary predicate to resolution of

the question presented because the operational function test is

resolved separately from the unitary business test. Allied-Signal,

504 U.S. at 787. Illinois, however, asks this Court to address the

issue, Resp. Br. 34-40, and noticed the issue in their brief in

opposition, see Br. in Opp. 7, 9 n.3 (discussing test and relying

on its cases), and before the Illinois trial and appellate courts, so

the record allows review of the issue.

14

reasonably possible, defer to the judgment of state

courts in deciding whether a particular set of

activities constitutes a ‘unitary business.’” Container

Corp., 463 U.S. at 175. Thus, if the state trial court

applied the correct legal standard, the Court will

grant deference to its conclusion if that conclusion

“was within the realm of permissible judgment.” Jd.

at 176 (quoting Norton Co., 340 U.S. at 538).

The trial court here applied the correct legal

standard to determine whether a unitary business

relationship existed between Mead and Lexis/Nexis.

Pet. App. 39a. The court examined whether Mead and

Lexis/Nexis were “functionally integrated,” shared

“centralization of management,” or evidenced “significant

economies of scale between the two businesses.” This

substantive standard is identical to the one repeatedly

applied by this Court. Allied-Signal, 504 U.S. at 789

(noting that the “hallmarks” of the unitary business

test are “functional integration, centralization of

management, and economies of scale”); Container

Corp., 462 U.S. at 179; ASARCO, 458 U.S. at 317;

Mobil Oil, 445 U.S. at 438.

The trial court found that none of these three

critical indicia of a unitary business existed in the

instant case. Pet. App. 39a. That determination fell

well “within the realm of permissible judgment”;

indeed, the ruling is overwhelmingly supported by

the record.

The trial court’s ruling that Mead and

Lexis/Nexis “were not functionally integrated” was

15

demonstrated by the fact that the two lines of

business maintained separate departments and

facilities. Pet. App. 35a. This was supported by the facts

to which respondents stipulated that established that

Mead and Lexis/Nexis maintained separate legal

departments, financial staff, accounting departments,

audit departments, credit and collection departments,

human resources departments, marketing departments,

computer systems, bank accounts, and personnel. J.A.

10-13. In light of this overwhelming evidence, the

trial court concluded that Mead’s “involvement for

extraordinary purchases requiring capital investment

and the interest rate advantage gained by Mead

through the nightly sweep of bank accounts is not

sufficient evidence that the two were functionally

integrated.” Pet. App. 35a.

Similarly, based upon those stipulated facts, the

state trial court determined that “Mead and

Lexis/Nexis did not share a centralized management.”

Pet. App. 36a. The trial court ruled that that evidence

was not rebutted by Mead’s approval of certain

“extraordinary purchases” and Mead’s consideration

of Lexis/Nexis in its “strategic planning.” Jbid.

Finally, the trial court held that “[t]here were no

economies of scale realized by Mead and Lexis/Nexis”

because the two businesses “had separate purchasing

departments and no joint purchasing activities.” Jbid.

Neither business even offered the other any discount

on the products or services of the other. "bid. In fact,

“Lexis/Nexis often bought paper from other vendors.”

Ibid. As sv ‘4, the only plausible economy of scale the

16

two businesses realized was the “increased interest

rate” due to nightly cash sweeps, ibid., which paled in

comparison to the stipulated facts demonstrating the

lack of a unitary relationship. Pet. App. 35a-36a; J.A.

10-13.

Respondents now attempt to overturn these

rulings by ignoring the stipulated facts to which they

agreed in the trial court, but those facts are

dispositive of the unitary business test. They

unequivocally establish that “Mead was, and is, in

the business of producing and selling forest products”

and that “Lexis/Nexis provided online information

services for legal, news and financial information in

the electronic publishing market.” J.A. 9-10. Although

Mead owned Lexis/Nexis, “Lexis/Nexis had its own

full-time management to control its day-to-day

operations.” J.A. 13. The two divergent businesses

had separate departments for every function, and the

two businesses did not share personnel or any

financial staff. J.A. 10, 13. The two businesses

maintained separate and distinct training programs,

computer systems and bank accounts. J.A. 11-12.

B. Respondents Misconstrue The Container

Corporation Ruling

1. Respondents invoke Container Corporation in

an attempt to turn the Mead paper and office supply

business and the Lexis/Nexis online information

service into one unitary business. Resp. Br. 34.

17

Respondents’ reliance on Container Corporation

is misplaced because this Court in Allied-Signal

explained that in Container Corporation, the hallmarks

of the unitary business relationship remained

functional integration, centralization of management,

and economies of scale. Allied-Signal, 504 U.S. at

789. Container Corporation demonstrated that these

essentials could be shown through “transactions not

undertaken at arm’s length; a management role by

the parent that is grounded in its own operational

expertise and operational strategy; and the fact that

the corporations are engaged in the same line of

business.” /bid. (citing Container Corp., 463 U.S. at

178, 180 n.19). None of those factors are present in

the instant case. See J.A. 10-13.

Indeed, respondents begrudgingly recognize one

of these significant distinctions between the instant

case and Container Corporation, i.e., “the taxpayer in

[Container Corporation| was engaged in the same

basic line of business as its subsidiaries.” Resp. Br.

37. Although respondents try to discount that

distinction as “immaterial,” ibid., that fact was

critical to the Court’s holding. The Court indicated

that it was reasonable to presume that two related

corporations engaged in the same line of business are

unitary. The Court explained that, where “a

corporation invests in a subsidiary that engages in

the same line of work as itself,” “it becomes much

more likely that one function of the investment is to

make better use—either through economies of scale

or through operational integration or sharing of

18

expertise—of the parent’s existing business-related

resources.” Ibid. The Court contrasted that with the

situation where, as here, there is an “{i|jnvestment in

a business enterprise truly ‘distinct’ from a

corporation’s main line of business,” which “often

serves the primary function of diversifying the

corporate portfolio and reducing the risks inherent in

being tied to one industry’s business cycle.” Container

Corp., 463 U.S. at 178.

Container Corporation demonstrates the practical

implications of this reasoning because the technical

assistance and equipment that the parent in that

case shared with its subsidiary were unquestionably

of significant value due to the fact that the parent

and its subsidiary were in the same line of business.

Id. at 172 (noting that “groups of foreign employees

occasionally visited the United States for 2-6 week

periods to familiarize themselves with [the taxpayer’s]

methods of operation” and that five executives of the

taxpayer were charged “with the task of overseeing

the operations of the subsidiaries”);’ id. at 173

* Exchanges of personnel, training programs, or day-to-day

executive oversight did not occur between Mead and

Lexis/Nexis. J.A. 10-13. Respondents identify three executives

who worked for both businesses at some point. Resp. Br. 7. In

fact, the record indicates that only a half dozen of 4000

Lexis/Nexis employees ever worked at Mead. J.A. 173. There is

no evidence that even these were strategic transfers of personnel

by Mead. Rather, the evidence supports the opposite conclusion

because one of the three executives testified that he moved to

Mead simply because he wanted to leave Lexis/Nexis for

“personal” reasons. [bid.

19

(explaining that parent could “providel | advice and

consultation regarding manufacturing techniques,

engineering, design, architecture, insurance, and cost

accounting” to its subsidiaries); id. at 179 (relying on

the. “‘substantial’ technical assistance provided by

{the parent] to the subsidiaries”); see also Exxon

Corp., 447 U.S. 207 (subsidiaries in the same line of

business as parent); Mobil Oil, 445 U.S. 425 (same).

2. Mead’s infrequent approval of major capital

expenditures by Lexis/Nexis, J.A. 15-16, bears no

similarity to the manner in which the taxpayer in

Container Corporation assisted its subsidiaries. Resp.

Br. 35. Unlike the acquisition of computer equipment

in the instant case, the assistance provided by the

parent in Container Corporation was extensive

because the parent “assisted its subsidiaries in their

procurement of equipment, either by selling them

used equipment of its own or by employing its own

purchasing department to act as an agent for the

subsidiaries.” Container Corp., 463 U.S. at 173. Thus,

in contrast to Container Corporation, Mead’s conduct

here was the “type of occasional oversight—with

respect to capital structure, major debt, and

dividends—that any parent gives to an investment in

a subsidiary,” without creating a unitary business.

Woolworth, 458 U.S. at 369."°

Respondents argue that Mead was run “in a decentralized

fashion” (Resp. Br. 6), implying that Mead’s hands-off approach

toward Lexis/Nexis supports a unitary business relationship

between the two. The record demonstrates, however, that

(Continued on following page)

20

Tellingly, respondents repeatedly assert that

there was control of Lexis/Nexis by Mead, but they

do not have accurate record support. Respondents

argue that Mead “reviewed” the business plan of

Lexis/Nexis, Resp. Br. 27, but the testimony they cite

demonstrates only that once a year Lexis/Nexis

would “explain [its] business plan and that was

pretty much it.” J.A. 163. Moreover, respondents

contend that “Mead, not Lexis/Nexis, decided how to

invest Lexis/Nexis’s excess cash.” Resp. Br. 27. The

trial testimony cited by respondents, however,

demonstrates that Lexis/Nexis “could have set up the

banking relationships * * * but chose not to.” J.A. 181

(emphasis added).”’

Respondents’ claim that Mead and Lexis/Nexis

must be considered a unitary business because Mead

submitted a consolidated tax return to Illinois is

meritless. Resp. Br. 4-5, 9, 38. As Illinois conceded by

stipulation, and the trial court recognized, the

consolidated tax return came about because Illinois

required Mead to file such a return and Mead did so

only to settle that dispute. J.A. 13; Pet. App. 39a

Lexis/Nexis “was much more independent than other divisions

of * * * Mead.” Ill. C.A. Rec. Vol. 9 at 112. Unlike Lexis/Nexis,

which “always had their own,” Mead’s other divisions “shared

services, procurement, HR, computer systems, things of that

nature.” Ibid.

" Respondents also cite to Mead’s approval of compensation

and bonuses for certain Lexis/Nexis executives. Resp. Br. 27

(citing J.A. 146). But the record demonstrates that Mead did so

for only a handful of the thousands of Lexis/Nexis employees.

JA. 13. '

21

(noting the filing was “at the direction of” respondents

and not probative)."’ Respondents’ current position

would require all nonunitary divisions of a multistate

corporation that are included in a consslidaved return

to be per se taxable as part of the taxpayer’s unitary

business, in conflict with the decisions of this Court.

Mobil Oil, 445 U.S. at 440."

III. RESPONDENTS WAIVED THEIR MERITLESS

ARGUMENT THAT THE RELATIONSHIP BETWEEN

Lexis/NExIs AND ILLINOIS ALLOWS RESPONDENTS

To Tax MEAD’s CAPITAL GAIN

Respondents contend that the Constitution

permits a State to tax an out-of-state investor’s

capital gain based solely on ties between the investment

and the taxing State. Resp. Br. 18-31, 46-49; see also

Br. of Multistate Tax Commission as Amicus Curiae

Supporting Respondents 17-19 (MTC Br.). Under this

argument, a State could impose a capital-gains tax on

an investor even if the investment is not part of the

“ Because States employ different standards as to when a

corporation and its subsidiaries must file a consolidated versus a

separate return, what state law requires cannot dictate what the

Constitution permits or else the limits of the Due Process and

Commerce Clauses would be meaningless.

" Respondents argue that Mead had “leeway as to how it

characterizes its business” in its reports and filings. Resp. Br.

30. But such “leeway” would not have permitted Mead to not

report ownership of Lexis/Nexis as an electronic publishing

business. Moreover, this Court places little significance on such

reports. Woolworth, 458 U.S. at 369 n.22.

22

investor’s unitary business and did not serve an

operational function.

A. Respondents Failed To Preserve This

Argument In The State Appellate

Court

Respondents repeatedly argue in their brief to

this Court that the relationship between Lexis/Nexis

and Illinois alone justifies Illinois’s tax on Mead’s

capital gain. Resp. Br. 18-31, 46-49. But respondents

did not raise this argument in the state appellate

court (and the court did not raise the issue sua sponte).

Rather, respondents argued that there were “two

circumstances” where the Constitution permitted the

State to apportion to itself for taxation a part of Mead’s

capital gain from its Lexis/Nexis sale: (1) if Mead and

Lexis/Nexis had a unitary business relationship and

(2) if Mead’s investment in Lexis/Nexis served an

operational function. C.A. Br. of Illinois 24-25.

Respondents thus waived under state law the

argument they now press that a connection between

the investment and the State sustains the Illinois tax.

A party that fails to raise an argument in the Illinois

appellate court waives that argument by operation of

state law. See Ill. S. Ct. R. 341(h)(7), (i) (points not

argued by the appellee are waived); Elementary Sch.

Dist. 159 v. Schiller, 849 N.E.2d 349, 358 n.2 (Ill.

2006) (appellee must raise all arguments it wishes to

preserve in its brief).

23

That waiver in state court bars respondents from

bringing the issue to this Court, because an alternative

ground for affirmance is waived in this Court if it was

not raised in, nor passed upon by, the appellate court

below. See, e.g., Glover v. United States, 531 U.S. 198,

205 (2001) (refusing to consider alternative

arguments for affirmance that were not raised in

court of appeals); Heckler v. Campbell, 461 U.S. 458,

468 n.12 (1983) (same); McGoldrick v. Compagnie

Generale Transatlantique, 309 U.S. 430, 434 (1940)

(same with respect to state courts).

B. This Argument Raises Issues That

Could Affect Other States Who Were

Not On Notice Of The Argument From

The Certiorari-Stage Briefing

Respondents’ argument based on Lexis/Nexis’s

connection to the State as a justification for Illinois’s

taxation of Mead’s capital gain also should not be

addressed by this Court because it asks this Court to

reach out and decide a constitutional question that

has limited relevance to the ordinary operation of the

Illinois taxation scheme, and one that could directly

“ As respondents point out, Resp. Br. 23 n.7, they may urge

affirmance on any ground supported by the record. But an

argument that was not preserved in the appellate court is

waived. Lorillard Tobacco Co. v. Reilly, 533 U.S. 525, 578 (2001)

(Thomas, J., concurring in part and concurring in the judgment)

(The Court does “not consider arguments for affirmance that

were not presented below.”).

24

affect other statutory schemes that are not before this

Court. Jllinois v. Gates, 462 U.S. 213, 221, 224 (1983);

Roberts v. Galen of Virginia, Inc., 525 U.S. 249 (1999)

(per curiam).

With respect to the taxation of capital gains from

intangible investments (such as from the sale of

Lexis/Nexis), Illinois’s taxation scheme does not turn

on whether the investment has ties to Illinois.

Rather, under Illinois law, apportionability of such a

gain depends upon the relationship between the

investment and the taxpayer. See 35 Ill. Comp. Stat.

Ann. 5/303(a), (b)(3), 5/304(a) (West 1994); Pet. App.

15a. In the absence of a sufficient connection between

the investment and the taxpayer under state law,

Illinois does not tax the capital gain, regardless of

whether or not ties exist between the investment and

the State. Jerome R. Hellerstein & Walter

Hellerstein, State Taxation § 9.11[2}[a] (3d ed. 2007).

By contrast, States such as New York calculate

their tax based on the relationship between the

investment and the State. See, e.g., N.Y. Tax Law

§ 210(3)(b) (Consol. 2007); In re Allied-Signal, Inc.

(Allied-Signal II), 645 N.Y.S.2d 895, 898 (N.Y. App.

Div.), appeal dismissed, 675 N.E.2d 1234 (N.Y. 1996);

Hellerstein, supra, at § 9.11[2}[a]. Such States have a

much greater interest in this waived argument,

because the constitutional permissibility of such

taxation schemes rises and falls upon respondents’

argument.

25

The States that could be greatly affected by

resolution of this argument were not on notice to

participate as amicus on this issue and, for example,

New York did not do so." Respondents did not raise

this argument in their brief in opposition, which

alone should preclude this Court’s consideration,

S. Ct. R. 15.2."

C. Reliance On An Investment’s

Relationship With The Taxing State To

Tax An Investor Cannot Be Squared

With This Court’s Precedents

Respondents’ argument that Illinois may tax

Mead for its capital gain based solely on a connection

between Lexis/Nexis and Illinois is without merit.

Respondents cannot prevail on this argument

based merely on their repeated citation (and that of

their amici) to general principles of constitutional law

with which petitioner has no disagreement—that a

State can tax a taxpayer with which it has minimal

After this Court decided Allied-Signal, the constitutionality

of New York’s scheme of taxing investors based on the

relationship between the investment and the State was

challenged. See Allied-Signal II, 645 N.Y.S.2d at 898-899. An

intermediate state appellate court rejected that challenge, ibid.,

and the New York Court of Appeals declined review, 675 N.E.2d

1234. No certiorari petition was filed.

* Indeed, respondents even rephrased the question presented

in their brief in opposition, but neglected to raise the argument

that they now press and which they had waived in the state

appellate court.

26

connections and to which it provides opportunities,

protections, and benefits, Resp. Br. 18, 23, and that

“an out-of-state company is subject to tax in any State

in which it conducts business,” id. at 46. In fact, such

taxes were paid here on an apportioned share of

Lexis/Nexis’s income earned in Illinois, as well as on

an apportioned share of Mead’s income earned in

Illinois. Respondents, however, would expand the

State’s taxing authority far beyond that."

1. Respondents’ position is foreclosed by

Allied-Signal, where this Court addressed

circumstances virtually identical to the instant case—

i.e., a State’s taxation of a nondomiciliary company’s

capital gain resulting from the sale of an investment

that also did business in the taxing State.

Specifically, in Allied-Signal a nondomiciliary

taxpayer challenged New Jersey’s tax on its capital

gain arising from the sale of an investment (stock).

504 U.S. at 773-774. Just as in the instant case, the

investment did business in New Jersey (and, in fact,

was a New Jersey corporation). [bid.

The connection between the investment and the

taxing State did not preclude this Court from

invalidating the tax on the nondomiciliary investor

“ The suggestion of amicus MTC that the goodwill taxed

here had a taxable business situs in Illinois (MTC Br. 21-23) is

wrong. The cases cited by MTC involve intangible property of

the taxpayer’s unitary business. Adams Express, 165 US. at

219. Passive investments are not subject to the business situs

principle. Jd. at 222.

27

as unconstitutional under both the unitary business

and operational function tests. As the amici States

concede (Br. of California et al. as Amici Curiae

Supporting Respondents 12), the relevant constitutional

inquiry under Allied-Signal “focuses on the objective

characteristics of the asset’s use and its relation to

the taxpayer and [the taxpayer’s] activities within the

taxing State,” 504 U.S. at 785, not on the relationship

between the asset and the taxing State.

2. The authorities that respondents cite do not hold

otherwise. Respondents rely heavily on International

Harvester Co. v. Wisconsin Department of Taxation,

322 U.S. 435 (1944), and Wisconsin v. J.C. Penney

Co., 311 U.S. 435 (1940), as purportedly justifying

their argument that Lexis/Nexis’s connection to

Illinois is enough to tax Mead for the capital gain on

its sale of Lexis/Nexis. But neither of those cases

supports respondents. Those cases stand for the

unremarkable proposition that a State has the power

to tax a business for its share of income that the

business earned within its borders.

Both cases arose because of a Wisconsin law that

required corporations doing business in that State to

pay a tax on dividends distributed to shareholders.

Int'l Harvester, 322 U.S. at 437; J.C. Penney, 311 U.S.

at 439-440. This Court upheld in both instances a

Wisconsin tax on an apportioned share of the

dividend, because the business was being conducted

in the taxing State. Int'l Harvester, 322 U.S. at 438,

442: J.C. Penney, 311 U.S. at 440 n.1, 444-445. The

Court reached this result because the tax in these

28

cases was a deferred income tax imposed on the

corporation that did business within the State, and

not on an out-of-state investor shareholder that

received dividends. Jntl Harvester, 322 U.S. at 441

(“The power to tax the corporation’s earnings includes

the power to postpone the tax until distribution of

those earnings ***.”); id. at 447 (Jackson, J.

dissenting) (explaining that the majority can sustain

the tax because it is “an income tax on the

corporation, deferred until the income _ was

distributed,” even though the dissent views that it “is

not an income tax *** but is a tax on the

stockholder”); J.C. Penney, 311 U.S. at 442 (“The

practical operation of this legislation is to impose an

additional tax on corporate earning within Wisconsin

but to postpone the liability for this tax until earnings

are paid out in dividends.”). In the instant case, by

contrast, Illinois is taxing the out-of-state investor,

Mead, rather than its investment, Lexis/Nexis.

These precedents are consistent with this Court’s

unitary business and operational function precedents.

In Allied-Signal and its predecessor decisions, just like

International Harvester and J.C. Penney, this Court

permitted a State to tax a company on the

apportioned share of the income (or dividends) that

are directly attributable to the company’s unitary

business in the State. But this Court’s precedents do

not support the proposition that a State can tax a

company on an apportioned share of a capital gain

that is unrelated to the company’s unitary business

conducted in that State, merely because the

29

investment associated with the gain has a connection

to the taxing State.

Indeed, under respondents’ theory, every out-of-state

investor could have to pay taxes on the capital gain

from a passive investment in every State where the

investment does business. The Constitution certainly

does not permit such a result.

IV. A Ruwinc IN RESPONDENTS’ Favor WoULD

Upset SETTLED EXPECTATIONS AND CREATE A

Risk Or DUPLICATIVE TAXATION

A. Respondents propose an unconstrained rule

so that a State may apportion “any gain realized from

the sale of a subsidiary[ ] over which the taxpayer had

considerable control and with which it dealt

regularly.” Resp. Br. 57. This rule would transform

every wholly-owned subsidiary into an operational

asset of the parent, and create chaos because States

and corporations have relied upon this Court's

well-settled principles to the contrary.

As this Court has recognized, state legislatures

have relied on this Court's distinction between assets

that serve an operational function and those that

serve an investment function—the very distinction

that Illinois seeks to eviscerate. Allied-Signal, 504

U.S. at 785 (“State legislatures have relied upon our

precedents by enacting tax codes which allocate

intangible nonbusiness income to the Jomiciliary

State ***.”). Multistate corporations likewise have

relied on Allied-Signal in structuring transactions

30

with a degree of tax certainty. See Br. of The Walt

Disney Company, as Amicus Curiae Supporting

Petitioner 25-26.

The reliance placed upon this Court’s precedent

is demonstrated by the consistently narrow

interpretation of the operational function test by

state courts in the fifteen years since Allied-Signal.

OSG Bulk Ships, 961 P.2d at 414. Other than the

decision below, state courts have repeatedly held that

an investment does not serve an operational function

where it was used neither as a source of working

capital nor as a hedge against a fluctuating supply of

a key commodity. See Hercules Inc. v. Commissioner

of Revenue, 575 N.W.2d 111, 117 (Minn. 1998);

Hercules Inc. v. Comptroller of Treasury, 716 A.2d

276, 281-284 (Md. 1998) (observing that this Court

“has not encompassed strategic, long-range decisions

of a company within operational functions”). The

drastic modification of the operational function test

suggested by respondents “would disrupt *** an

area of the law in which the demands of the national

" Respondents inexplicably suggest that the Hercules

courts’ determination of no-operational function was based on

the fact that the taxpayer exercised no control over the asset.

Resp. Br. 56-57. The issue of control was one factor (of many) in

these courts’ unitary-relationship analyses, 575 N.W.2d at 116;

716 A.2d at 280-281, but there was no discussion of exercise of

control in the courts’ application of the operational function test,

575 N.W.2d at 116-117; 716 A.2d at 281-284. Illinois’s reliance

(Resp. Br. 55) on the California Supreme Court Hoechst Celanese

decision is also misplaced, as noted above, see page 11.

31

economy require stability.” Allied-Signal, 504 U.S. at

786.

B. This case is not just about Illinois’s attempt

to tax an apportionment of Mead’s capital gain. Resp.

Br. 50. Under respondents’ rule, every State where a

corporation does business could tax an apportionment

of the capital gain earned by that corporation from

intangibles. Such taxing authority by nondomiciliary

States would be in addition to the constitutional

authority of the domiciliary State to tax the entirety

of such a gain. Mobil Oil, 445 U.S. at 444 (“Taxation

by apportionment and taxation by allocation to a

single situs are _ theoretically incommensurate

* * * by

Such potential for double taxation is the final

defeat for respondents. Contrary to their claim (Resp.

Br. 50-51), this Court has never required evidence of

duplicative taxation in a particular case to invalidate

an unconstitutional taxing scheme that would allow

such duplication. Indeed, the potential for double

taxation was an express concern of the Court in

Allied-Signal. See 504 U.S. at 785 (“Were we to adopt

New Jerseys theory, we would be required” to

“authorize what would be certain double taxation.”)."”

" Respondents are wrong that Kemppel v. Zaino, 746

N.E.2d 1073 (Ohio 2001) dictates that Ohio would have

apportioned the capital gain. That case concludes that, under

Ohio law, capital gains from a business's total liquidation are

allocated to the taxpayer’s domicile. Jd. at 1076-1077.

32

CONCLUSION

For the reasons set forth above and in

petitioner’s opening brief, the Court should reverse

the judgment below.

Respectfully submitted,

PAUL H. FRANKEL

BETH S. BRINKMANN Counsel of Record

BRIAN R. MaTsuI CRalc B. FIELDS

NICOLE D. DEVERO ROBERTA MOSELEY NERO

MORRISON & FOERSTER LLP MORRISON & FOERSTER LLP

2000 Pennsylvania Ave.,.N.W. 1290 Avenue of the Americas

Washington, DC 20006 New York, NY 10104

(202) 887-1544 (212) 468-8000

Counsel for Petitioner

DECEMBER 28, 2007