Transcript

IN THE SUPREME COURT OF THE UNITED STATES

ALLIED-SIGNAL, INC., AS SUCCESSOR-IN-INTEREST TO THE BENDIX CORPORATION, Petitioner v. DIRECTOR, DIVISION OF TAXATION

No. 91-615

April 22, 1992

The above-entitled matter came on for oral argument before the Supreme Court of the United States at 12:59 p.m.

APPEARANCES:

WALTER HELLERSTEIN, ESQ., Athens, Georgia; on behalf of the Petitioner.

MARY R. HAMILL, ESQ., Deputy Attorney General of New Jersey, Trenton, New Jersey; on behalf of the Respondent.

PROCEEDINGS

12:59 p.m.

CHIEF JUSTICE REHNQUIST: We'll hear argument now in No. 91-615, Allied-Signal, Inc., v. the Director of the Division of Taxation.

Mr. Hellerstein.

ORAL ARGUMENT OF WALTER HELLERSTEIN ON BEHALF OF THE PETITIONER

MR. HELLERSTEIN: Mr. Chief Justice and may it please the Court:

The essential question now before this Court is whether there must exist some connection beyond the mere jurisdictional presence of the corporation in a State in order for a State to tax an apportioned share of all of that corporation's income. In other words, must a State have some connection with the activities of produced income in order to tax an apportioned share of it?

We believe the answer to this question is yes for three reasons that I'd like to state briefly and then return to in more detail. First, a State's power to tax a nondomiciliary taxpayer depends on the benefits and protections that the State provides to the taxpayer's activities in the State.

Second, over 100 years of precedent of this Court make it clear that there must be some connection beyond mere ownership between the in-State activities of the corporation and its out-of-State activities before the State can take account of those out-of-State activities in determining the in-State tax liability.

QUESTION: Mr. --

QUESTION: What about a -- excuse me.

QUESTION: Go ahead.

QUESTION: What about a domestic corporation incorporated in the taxing State?

MR. HELLERSTEIN: Justice White, in terms of State tax jurisdiction there clearly are two theories on which jurisdiction can be based, one with regard to nondomiciliary taxpayers is source. Another theory, which is a well-established theory in the tax jurisdiction, is residency, and there is no question that a State of residence or domicile does have power to tax all of a corporation --

QUESTION: Even though the income that it includes within the gross income is produced by activities that have absolutely no connection with the State.

MR. HELLERSTEIN: No, that -- Your Honor, the reason underlying the residence principle does not have to do with the particular --

QUESTION: Oh, you mean residence just gives a connection no matter where the income comes from.

MR. HELLERSTEIN: Your Honor, that is a well-established principle --

QUESTION: Well, it may be, but the kind of an argument you're making would seem to challenge that.

MR. HELLERSTEIN: No, Your Honor, because our essential position in this case is that when you have a nondomiciliary that has no connection with the State other than the activities that is engaged in there, the State must provide benefits and protections to those activities. With regard to a resident taxpayer, whether it's an individual or corporation, while in principle the State has power to tax all of the income, that power does in fact yield when there are activities in other States that are taxable by other States.

QUESTION: Well, what about a nondomiciliary corporation that is doing business in the State and it's a -- and there's no question that the State can tax its share of the income of that corporation because it's doing business there.

MR. HELLERSTEIN: That's correct, Justice White --

QUESTION: Now, you would say that that nondomiciliary's corporation income from activities that have absolutely no connection with the State, like investment income --

MR. HELLERSTEIN: That's correct, Your Honor, because --

QUESTION: Would have -- the State could not include it in gross income.

MR. HELLERSTEIN: That is right, because there has to be an organic connection between the activities of a nondomiciliary taxpayer and its activities outside the State in order for the State to look outside.

QUESTION: So there's a difference between a domiciliary corporation and a corporation that is not domiciliary but it's doing business in the State and is taxable there on its activities.

MR. HELLERSTEIN: Yes, Justice White, there is a fundamental difference that underlies, for example, the basic scheme in which the United States taxes --

QUESTION: You mean -- what you mean is that there's a theory, there's an accepted theory that you can tax a domiciliary corporation on all of its income.

MR. HELLERSTEIN: Justice White, there is more than a theory, there is a practice going back 100 years, the very basis, for example, that the United States taxes all domestic corporations on income it earns in France or Germany, or wherever, is based on the notion that a domestic -- a domiciliary corporation may be taxed on all of its income.

What is it that gives the State the power, for example, to tax an individual on all of his income wherever its earned? It's the same residence-based principle, which is as well-established as the source-based principle.

However, when we have States seeking to tax the same income, it's quite clear when there's an intersection between those two principles, then it is the source State that generally may prevail over the residence State, because to allow both States to tax would violate the commerce clause.

QUESTION: Well, Mr. Hellerstein, I think that probably ASARCO put forward the view that for the nondomiciliary entity to be -- for their dividends or income to be taxed in the taxing State that the dividend payor has to be unitary with the payee. Something more is required under ASARCO than just a flow of value into the taxing State from that nondomestic entity. Now, do you think that's a valid requirement?

MR. HELLERSTEIN: Justice O'Connor, we have never taken issue with the proposition that there may be apportionable income, other than income that is related by a unitary relationship between the underlying payor and payee. For example --

QUESTION: But there certainly is language in ASARCO that would say just that, isn't there?

MR. HELLERSTEIN: Yes, Justice O'Connor, there is language, you know, in ASARCO which if read literally and applied to facts that were not at issue in ASARCO might well exclude, for example, income of a foreign products nature or working capital.

We have certainly not taken issue with the notion that investments that are integrally related to the taxpayer's operations in the State, organically related -- capital that flows in and out of the business, that certainly wouldn't be apportionable, but there is no reason, as New Jersey suggests here, because of this doctrinal foot fault, if that's what it was in ASARCO --

QUESTION: So there has to be some flow of value into the State, anyway.

MR. HELLERSTEIN: We fully agree with that, and indeed --

QUESTION: Well, all right. Now, if you agree with that, can you say there is no such value that flowed in here in the circumstances of this case where the purpose of the investment was to acquire enough capital to go ahead and acquire more of the underlying business in the domestic State?

MR. HELLERSTEIN: Yes, Justice O'Connor, because the only connection here is the very type of connection that this Court has described as attenuated, not organic, that connects every business that's under a single, corporate shell. For example, if --

QUESTION: But isn't it something more than that? Maybe it isn't the hard-core definition of working capital, but it's capital for a longer term expansion, in effect.

MR. HELLERSTEIN: Yes, Justice O'Connor. In that situation, for example, suppose that Bendix had earned income from aerospace operations in New Jersey. Now, Bendix takes that income which is taxed by New Jersey, and now it invests in some other asset having nothing to do with New Jersey -- a yak farm in Outer Mongolia -- and then it sells the yak farm and it buys a hula hoop factory in South Korea.

New Jersey, I suppose, still has some attenuated connection to the original dollar that might have been earned in New Jersey, and sometime in the 21st Century might well be reinvested in New Jersey, but until that income has that connection with New Jersey, even if it had some historical connection with New Jersey or may be poised to be reinvested in New Jersey, to use the phraseology of some of the amicus briefs here, New Jersey does not have that organic connection with that income to tax it, unless you want to fully abandon the notion which has underlay this Court's decision for over 100 years --

QUESTION: Well, suppose that in New Jersey the Bendix board of directors meets and they say we have a very high-tech speculative research project we want to conduct in New Jersey. Now, the only reason we're willing to undertake that is because we know we have a very safe, secure investment in ASARCO. There's no checks flowing back and forth, but isn't there a value there that the company relies on?

MR. HELLERSTEIN: Justice Kennedy, that's precisely the kind of value that the Court said was so attenuated that it could not be included in the apportionable tax base in cases like Fargo v. Hart.

QUESTION: But is it attenuated in the real sense? Isn't the example I've given you, the example of a very real business kind of a decision and a business kind of judgment, and isn't this the way a business is properly valued? If you were a banker, you'd certainly want to see the ASARCO balance sheet before you lent any money in New Jersey, if you thought the company was a little on the thin side.

MR. HELLERSTEIN: Well, that's -- Justice Kennedy, it's certainly correct that in that attenuated sense, you have a connection.

On the other hand, I think it's important to recognize that in Fargo v. Hart, for example, there were bonds worth 15.5 million that the Court recognized in some sense added to the creditworthiness of American Express in Indiana, but Justice Holmes said that was not sufficient.

In other words, the mere fact that there was wealth in the corporation, there was money that adds to the riches of the corporation, does not give the State the concrete connection that it needs where it is not a domiciliary State to tax the income of an out-of-State corporation.

QUESTION: Well, you say that's attenuated, but I think that's the issue in the case. It seems to me there's a manufacturing analogy that you're relying on here that is not wholly in accord with the way many modern business corporations are formulated and with the way they evaluate their own assets.

MR. HELLERSTEIN: Well, the consequences -- the consequences of abandoning the notion that there must, in fact, be a concrete, organic connection between what goes on within the State and what goes on without the State, because under this analysis everything, of course, becomes apportionable, you then have the consequence of throwing everything into the tax base regardless of whether it might have been unitary or not under prior law, and having significant misattributions of income.

For example, suppose we have -- to go back to the example we had in the original argument of this case, you have a series of beauty parlors in New Jersey, wholly unrelated parking lots in California. Now, in some general sense the parking lots are adding to the wealth of the business. There's a connection there.

QUESTION: Suppose the beauty parlors are not doing well and they borrow money, does it make a difference to taxation whether or not the banker looks at the balance sheet to see that the parking lots are in the balance sheet?

MR. HELLERSTEIN: If the corporation goes to a third-party banking institution and borrows based on its overall wealth, it might well make a difference to the bank as to whether or not it was willing to make the loan, but that is precisely the kind of overall attenuated notion that has never been the basis for allowing States to tax income.

We're talking now about income from activity such as the parking lot, or the investment, which itself is not generated by any activities in the taxing State. In other words, to go into this parking lot example, what protections or benefits has New Jersey provided to the parking lots in California that would allow it to tax that income? The Court has always said there must be some connection.

Now, you've suggested a loan. Clearly, if there were interconnections between the parking lot and the beauty parlors that might well justify looking to the entire unitary business, but once you say that any time anything is under a single corporate entity and in some general sense may add to the wealth of the corporation, this is simply abandoning the underlying notions that justify a portion of it in the first place.

Why do we -- one thing, why is it the States have been allowed to look outside the State? We start with a notion that States are confined territorially in their tax power. Now, the original notion was, going back to the earlier cases, there must be some organic connection because as a limited exception to the principle that States may only tax within the State when in fact there's a connection between what goes on within the State and what goes on outside the State, then the limited purpose of determining the value of what's in the State, it may be appropriate to look outside the State.

Then the Court said of course, in cases like Wallace v. Hines and Fargo v. Hart, and in ASARCO and Woolworth, when you're looking outside the State you may not sweep into that tax base these unrelated assets. You can't sweep in these bonds, you can't sweep in the parking lot or the yak farm, or whatever it might be.

Now New Jersey says, oh, this is all so difficult. We can't distinguish. There are these flows going back and forth. In effect, New Jersey is -- would bite the hand that feeds them. The first -- the only reason New Jersey could look outside in the first place was because of this organic connection. Now New Jersey says, let's abandon any notion of organic connection. Let's just sweep it all in when it's too difficult.

Now, wholly apart from the theoretical flaws in New Jersey's approach, the practical consequences of adopting New Jersey's scheme, they're absolutely astounding when you think about the existing structure that's grown up around this Court's understanding of the limits on State taxation. Over 30 State laws are based on the very distinction that underlies the unitary business principle, namely identifying income that's organically connected and is therefore apportionable because of its link, and income which is nonbusiness, which is not included.

All of these -- if this Court were to adopt the notion that New Jersey has advanced here that everything gets swept in simply because it's within the corporation and has some attenuated connection, you have in effect invalidated the laws of 30 States. Why? Because this Court has made it clear that taxation by allocation -- that is, sending all of the value to a single State and taxation by apportionment, allowing all the States to allow a piece of it, is theoretically incommensurate. Why? It would lead to inevitable multiple taxation.

If New Jersey, for example, can tax the gain from raw land that this hypothetical corporation has in Florida, or from investment in an unrelated metal mines corporation, New Jersey gets an apportioned share of that. At the same time, under the existing States' regimes, Florida would tax 100 percent of it.

Why? Well, because it's raw land in Florida. It's got a connection. It's nonbusiness, allocable income. Who would get the gain from the metal minings company would be whatever the commercial domicile was under the principle that a commercial domicile has in effect the residuary power.

QUESTION: Well, Florida can surely tax the real estate located in Florida.

MR. HELLERSTEIN: That's correct, Chief Justice Rehnquist, and as a result of that combined with New Jersey's alleged power to tax an apportioned share --

QUESTION: Of income.

MR. HELLERSTEIN: You're talking about the gain now.

QUESTION: A what?

MR. HELLERSTEIN: I was assuming that you had land in Florida and that the land was sold at a gain. Now, Florida would clearly tax 100 percent of that gain because this was land unrelated to any business of the corporation and therefore would be regarded by Florida as nonbusiness income taxable in full in Florida.

At the same time, New Jersey, simply because this land was held by the same corporation under a single corporation that owned beauty parlors in New Jersey, they would say this is part of the business, we can tax an apportioned share of that income.

QUESTION: Yes. They'd put it in the, what, the numerator --

MR. HELLERSTEIN: Well, they would put it --

QUESTION: And the denominator.

MR. HELLERSTEIN: They would put it in the apportionable tax base.

QUESTION: Well, what's wrong with that?

MR. HELLERSTEIN: What's wrong with that is that it would lead to multiple taxation, because the same income -- the same income has already been taxed in Florida.

QUESTION: Well, in a very general way, perhaps, but there's no terribly fire-strict prohibition against that sort of multiple taxation, is there?

MR. HELLERSTEIN: Well, Chief Justice Rehnquist, this Court has made it clear in cases such as Standard Oil v. Peck and as recently as Mobil that the intersection of a regime of allocation, let us say 100 percent of the tax base were to again go into one State, then that collides with a regime of apportionment, that the two cannot coexist. One must yield, and in general what the Court has indicated in that situation is that the State that must yield is the State of --

QUESTION: That may be true as a generality, but I mean I think what you've just pointed out, perhaps, is arguably a rather small exception to it. You know, land located in Florida, a traditionally absolutely immobile thing, has always been subject to taxation by the State where it's located, and a tax on a capital gain resulting from the sale of that land, I'm not sure that would come under the head of double taxation if New Jersey also just seeks to tax a proportionate share of the income.

MR. HELLERSTEIN: Well, Chief Justice Rehnquist, we're not just talking about the sale of an isolated piece of land, we're talking about the sale, for example, of all stocks, bonds, all the capital gains that are at issue in this case, which incidentally would not find any reflection in the factors underlying New Jersey's apportionment scheme.

That is, what New Jersey wants to do -- take this case. There is $56 million of apportionable tax base. That was the pie we started with. New Jersey says, well, because there's some connection between what's going on in New Jersey and this ASARCO gain, we want to increase the tax base by $211 million, and how do we -- what do we do about that?

Do we make any adjustment in the factors -- well, we'll put the receipts -- we'll let the receipts be -- not even the receipts, but capital gain, go into the numerator of the receipts factor which is measured in the billions, so there's virtually no effect on the amount, of the share of the pie. All that's happened is that the pie has expanded enormously, and the question --

QUESTION: Mr. -- well, go ahead. I want to ask a question when you have a moment.

MR. HELLERSTEIN: Yes, Justice.

QUESTION: More than half the States have adopted something called the Uniform Division of Income for Tax Purposes Act, called UDITPA, and under UDITPA, as I understand it, it would say -- it would define what is business income, and it would say that business income is taxable by the State, and that it includes income from intangibles if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operation.

Now, do you think that is valid, a valid concept?

MR. HELLERSTEIN: Justice O'Connor, we are quite satisfied with that definition, which we believe actually reflects the longstanding dichotomy that this Court has drawn between apportionable and allocable income.

QUESTION: Do you think that the Constitution allows that but not one step further in terms of defining taxable income?

MR. HELLERSTEIN: Justice O'Connor, certainly, as the Constitution has been understood up to today, the understanding is very clear that merely because -- and this is the New Jersey position here -- merely because an asset or income is earned by a single corporation that happens to be doing business in the State, it's absolutely clear that that does not constitute a sufficient connection.

Now you're asking the question whether or not the UDITPA definition is one, if stretched a bit, would be satisfactory. Well, I think the Court gave the right answer in ASARCO when it said the stretching of this to the point of oblivion, where you simply look at the corporate purpose, is unsatisfactory.

We concede, and we are -- let's say we're sympathetic to certain aspects of your dissent in the ASARCO opinion with regard to the facts of that case. It could well have been that the flows of value between ASARCO and Southern Peru should have justified a different holding on the facts, but not the basic principle which you yourself acknowledge in that decision, namely that there's got to be a unitary business, the linchpin of apportionability.

QUESTION: All right, and do you think UDITPA is as far as the Constitution will allow, not a step further?

MR. HELLERSTEIN: We believe that UDITPA reflects the constitutional rule. When you say not a step further, there are -- there may be some -- there are some constructions of the business income definition that have gone too far, may have gone too far -- this Court has struck them down -- but certainly not only the definitions, but if you look at the way that the multi-State tax commission that administers the statute that is in force in 30 States, they draw the very same lines.

They talk about investments that are part of the business and investments that are not part of the business, long term investments that don't relate to the current operations, allocable businesses --

QUESTION: What happens under UDITPA? The domiciliary State can tax all the intangible income, and yet if it fits under UDITPA's formula in another State, that other State can have some apportion.

MR. HELLERSTEIN: No, Justice O'Connor. Under UDITPA the line is drawn, regardless of whether the income is tangible or intangible, as to whether it is apportionable. So, for example, if it were working capital, we would concede that under the uniform act it quite clearly would be apportionable. That goes into the tax base of all the States in which there's a business.

Now take income that clearly is not apportionable under UDITPA. For example, in our judgment an investment in an unrelated metal mining company, 20 percent investment. What happens then?

That is then nonbusiness income. It doesn't go in any State's apportionment factor. It simply is -- it goes to the commercial domicile under the well-established principle that the State of residence has the power to tax all the resident's or domiciliary's income until -- unless and until it collides with some other State's power on a source basis.

New Jersey simply has no source-based power to get at this income. It's not that it's in any sense fairer to send to the domicile. There has to be the connection.

QUESTION: Is the principle concern with double taxation the taxing authority of the domicile State?

MR. HELLERSTEIN: Justice Kennedy, it could be either. That is, the principle concern is if this Court were to adopt New Jersey's everything is apportionable regime and not indicate the same point, that States could allocate what under their statute is plainly nonbusiness income, then one of those must yield in order to avoid multiple taxation.

QUESTION: But it's not -- if the State -- if the corporation is incorporated in the State of Illinois, is the concern that Illinois will cause the double taxation, or is the concern if we adopt the New Jersey regime, that there will be double taxation in all of the other 49 States, or in some of the other 49 States?

MR. HELLERSTEIN: Well, I think the answer to that, Justice Kennedy, would depend on which State would have to yield, I would assume, looking, for example, at Mobil, where the court saw this problem. Vermont wanted an apportioned share of the income, allegedly New York had the power to tax it all. The court said no, New York can't tax it all.

So what would happen if this Court were to adopt New Jersey's regime and would at the same time adhere to the notion that this kind of multiple taxation was inappropriate, it would render all of the domiciliary States' nonbusiness income apportionable. That is, it would say you couldn't allocate this any more. It would say that was no longer the law.

I would like to reserve my --

QUESTION: Before you sit down, would you just tell me what the third point you were going to make was when you started your argument?

MR. HELLERSTEIN: Well -- thank you, Justice Stevens. I was going to talk about the chaos that I think the adoption of the --

QUESTION: I understand.

MR. HELLERSTEIN: Thank you very much.

QUESTION: Thank you, Mr. Hellerstein.

Ms. Hamill.

ORAL ARGUMENT OF MARY R. HAMILL ON BEHALF OF THE RESPONDENT

MS. HAMILL: Mr. Chief Justice, and may it please the Court:

We are pleased to be asked back to address the Court's questions. As you know, we argued initially that there was no need to overrule ASARCO and Woolworth, provided that the Court would clarify the statements in ASARCO and Woolworth, that there has to be an operating relationship between the payor and payee of dividend income in order to apportion that income.

But if the Court wishes to clear up the confusion and dispel the misconceptions that those opinions have generated, it seems to us that it should overrule the two opinions, and once you get to that point -- and it should do so retroactively. But once you get to that point, then the question is, where do you draw the line and how do you apportion, and we see no bright line, no clear line until you go all the way to the corporate entity.

And so we say that what is received as income by the corporation, by a nondomiciliary corporation that is doing business in the taxing State, should be apportioned by that State, and the reason we believe that is correct is that when there is a common corporate management, there are inevitably going to be flows of value. There are inevitably going to be mutual interdependence, no matter how disparate these activities seem, the parking lot, the beauty parlor. As Justice Kennedy suggested, there may be borrowing going back and forth. There may be tax losses offsetting one or another. There may be the need for geographical diversification. There may be a William Agee running both of those who sees that there is money to be made in beauty parlors in New Jersey and he can generate capital to go into parking lots in California.

The permutations of that are infinite, and to ask the lower courts and the taxing authorities to pull apart these very fine, intricate distinctions is really asking too much, and it is getting into the very area that the Court addressed with the exception to the corn products -- the corn products exception to the statutory definition of capital assets where we were talking about business motive. If the motive for acquiring an asset was to further the business, it wasn't a capital asset, and therefore, it generated an ordinary loss on sale, the Court saw that problem and got rid of it in Arkansas Best and severely limited the corn products doctrine.

And it really seems to us that we have got to move that --

QUESTION: Unitary business concept is just out of the picture I suppose.

MS. HAMILL: We think it is not out the window. We think that we are trying to --

QUESTION: Well, you can't draw a line where it is in, can you?

MS. HAMILL: Why can't you define it at the corporate level? Why can't you say that the unitary ties are brought about by that management, that that is the out-of-State activity that is tying the out-of-State activity to --

QUESTION: If you do that, then can the State, where the subsidiary is resident, so to speak, can it tax all 100 percent of the income, even though New Jersey is going to take a share of it too?

MS. HAMILL: Justice O'Connor, I want to answer that question by -- the way you asked that question makes me wonder about this combined reporting issue again. We don't tax the income of the subsidiary. We tax the dividends --

QUESTION: The dividends, right.

MS. HAMILL: And so we don't care what happens to that subsidiary, where it is, what it does --

QUESTION: But the subsidiary sure does.

(Laughter.)

QUESTION: And so does the parent.

MS. HAMILL: We -- the fact, the double taxation that would result would be, I think what Mr. Hellerstein was talking about, where you have a UDITPA State that says, this particular kind of income is allocable entirely to the commercial domicile. For instance, take the gain on the sale of real estate located in a UDITPA State; if the UDITPA State said that was nonbusiness income, that is, not related to the business being carried on, it would then say that the entire gain should be allocated to that State.

QUESTION: And if it is business income?

MS. HAMILL: Then it would be apportionable. We meanwhile, under our theory, would say it is all apportionable because it is all, that gain is received by the company that is doing business in New Jersey.

QUESTION: Would you win under the UDITPA definition in this case?

MS. HAMILL: I think so. Not every State would have called this particular gain business income, but under that business income definition, I believe there is a transactional test and a functional test, and we would arguably meet the functional test broadly defined.

QUESTION: But I take it from your argument that you would make the submission that UDITPA itself is an unworkable rule?

MS. HAMILL: I think that follows logically from what we are saying, but what we are trying very hard to do is not to upset the taxing schemes of the majority of the States, not to upset the combined reporting States. We are just --

QUESTION: You just want us to overrule ASARCO.

(Laughter.)

QUESTION: What is the constitutional rule that you replace ASARCO with in the UDITPA States? Can the domiciliary State now tax so that you can have two States taxing, or is it only New Jersey, the nondomiciliary States that can apportion?

Are you going to have double taxation --

MS. HAMILL: No, no --

QUESTION: -- or is it that the domiciliary State gets frozen out?

MS. HAMILL: We say, first off, you have that problem already, because you can have a UDITPA State characterizing something as nonbusiness income and a full apportionment State saying it is business income. But say, if we do admit that what we are advocating will increase it --

QUESTION: Because of disagreements of opinion of what kind of an income it is.

MS. HAMILL: What is business income, that's right.

QUESTION: But I am assuming everybody agrees what kind of income it is.

MS. HAMILL: All right.

QUESTION: Can they both tax it or can only the State, the allocating State tax it?

MS. HAMILL: I think it depends on what you think the basis for the taxation is. If you think it's that the benefits and protections that are being extended by a State justify the tax, you could very well find that the UDITPA State that is trying to tax it all has a sufficient basis for doing that because the management is there, the income may be -- there is a connection with that State.

On the other hand --

QUESTION: It's your theory. What do you think?

MS. HAMILL: On the other hand, I think our -- in that situation, we would have a sufficient basis too, and we would be right into the Court's cases, the intangible personal property cases and the personal income tax cases.

QUESTION: But I am asking you, under your theory, don't put it on me, you say it depends on what you think the basis is. What do you think the basis is?

MS. HAMILL: Oh, I think the basis -- I think it is the benefits and protections are extended.

QUESTION: They can both tax?

MS. HAMILL: Yes, they can both tax, and I think the Court's cases dealing with intangible property, Curry v. McCanless and the very common scheme under the personal income tax where the State of residence can tax all an individual's income and the State where that individual earns wages or whatever can tax the wages, you have absolute, inevitable double taxation. And the only reason it doesn't happen in practice is that the State of residence grants a credit. But it --

QUESTION: Well, we shouldn't encourage it, should we, at least if we follow language in our prior opinions, that isn't a goal to be achieved. It is to be avoided.

MS. HAMILL: True, but I think if you are going to promulgate a constitutional rule that says, favors one State over another, you are taking on more than just this case and just the apportionment of income in the context of multi-State businesses and the corporate net income taxes, because you are talking on the intangible personal property tax cases and the personal income tax cases. Ideally, I think you are absolutely right.

QUESTION: May I ask a question about, I think it is Justice Kennedy's hypothetical, if we assume a business that has its major operations in California, have a whole bunch of operations there, but none of them on the East Coast and all, and they also separately buy and sell a parking lot in Florida which under traditional rules would not have been considered part of the unitary business. It would be considered a separate transaction.

In your view, could Florida tax the entire income from the separate transaction, or must it treat it as part of a unitary business in the same corporate shell?

MS. HAMILL: No. We think that Florida could treat it --

QUESTION: Could have an option to do it either way.

MS. HAMILL: Could do it either way because the Constitution sets limits, and if there is nothing constitutionally wrong with what Florida wants to do, it can go ahead and go it. But that doesn't get -- then you have the double taxation problem.

QUESTION: The only thing that would be constitutionally wrong is it would lead to double taxation which --

MS. HAMILL: Yes --

QUESTION: -- would not otherwise occur under our present regime?

MS. HAMILL: Well, no, it might very well occur.

QUESTION: No, it wouldn't, because I am assuming, my hypothesis is that it is not a unitary business under present rules.

MS. HAMILL: Oh, all right, then perhaps not. That's correct.

QUESTION: See, that would cause a change which would increase the possibility of double taxation.

MS. HAMILL: Right, yes. But let me talk just a minute about this risk of double taxation. You know, we had 32 corporations filing amicus briefs at this stage of the proceeding, and I don't know if you read our reply brief and looked at the appendix, but 20 of those 32 corporations are domiciled in States that do apportion all income, two-thirds of them, no possibility of double taxation at all.

Then again --

QUESTION: Yet, yet.

MS. HAMILL: No --

QUESTION: I mean, those States could change their laws.

MS. HAMILL: Oh, sure, they could. But if full apportionment were to be the rule and they are already doing full apportionment, I don't know why -- and they are allowed to bring in more, I don't know why they would change. But let me just go on a minute with this risk of double taxation. Then you have to have the UDITPA States say, okay, this is nonbusiness income, but there is a presumption in the multi-State tax commission regulations, I think it is in UDITPA as well, that income is business income, apportionable.

Then you have to have a situation where in fact there is double taxation and if you look at the laws of all the States you find that the vast majority of them have very substantial exclusions for dividend income. Dividend income, of course, is the major recurring kind of intangible income. 70 to 100 percent of dividend income is excluded by the vast majority of the States.

QUESTION: Of course, if your hypothesis holds, UDITPA also is unworkable and I think that should be stricken down as well.

MS. HAMILL: Well, I don't think we ought to rewrite UDITPA. There may be movements --

QUESTION: Well, you are rewriting the basic formula under the due process clause.

MS. HAMILL: No, you aren't, because there would be nothing wrong with a UDITPA State saying, we don't want to apportion. We are happy with trying to make this distinction between property, intangible property that is integrated with the business. We want to do it. We like it that way.

Why should the Court or why should we suggest that they not do it? It seems to me it is part of Federalism that they be able to go on and do exactly that. We just say that we don't think it is required by the due process clause and we don't really have the ability to keep on trying to make these distinctions. It is very, very difficult.

Let me just turn just a minute to the theoretical basis on which Allied grounds its argument which is that -- the source argument, in that a nondomiciliary State can tax only on a source basis, and that there must be a relationship, a direct relationship between the activities generating the income from out-of-State and what's going on in the taxing State.

I don't think you find that in the Court's cases, except possibly in ASARCO and Woolworth. I don't think the Court has ever been so explicit, and I don't think that there is any reason why single corporate management couldn't provide that unifying factor that would make it sensible to say that all of the income of a single corporation is unitary income.

The property tax cases on which Allied relies -- Fargo v. Hart, Adams Express, Pullman's Palace Car -- are property tax cases and the difference is that they are valuing tangible property in the State, and you can look at that property. And you could see in Fargo v. Hart that there was $8,000 worth of property, tangible property in the State and the apportionment formula put $800,000 of property in the State.

And when it is property that you can see and there is a benchmark, it gets stuck in your craw when you say that the out-of-State values did that much for this tangible property in-State. But income is very different, you can't see it, you can only measure it indirectly. You certainly don't know where it is earned, and so that there is a great deal more flux, a great deal more uncertainty in where income is sourced.

The other problem that I think Mr. Hellerstein didn't quite get to, but I know he has 5 minutes, and so I guess I had better -- and I don't have any more time, so after I sit down -- is the question I think of the chaos. And I think he probably would start with the lack of fair apportionment, that by putting all the income in the base and then going to the apportionment formula you are going to have terrible, terrible misattributions of income.

We don't think that is necessarily true. We think that if you make the decision that the intangible is related to the business, it is legitimate to use the three-factor formula, perhaps some modification of the formula to apportion all of that income. It isn't necessarily a misattribution of income. Working capital is apportioned, traditionally, income from working capital, using the three-factor formula. Very often when dividends are determined to be business income, apportioned using the three-factor formula.

If too much income is being taxed in a particular State, the taxing authority, the lower courts can deal with that. They can deal with the apportionment formula --

QUESTION: How can you say that unitarian concepts are, for the most part, out of the window?

MS. HAMILL: Because the formula, I am talking about the three-factor formula, you could for instance decide that you should put intangible property in the denominator of the property factor. That would be the simplest thing to do.

QUESTION: You are suggesting that States will not maximize their taxable authority?

MS. HAMILL: Well, you know, over the past 10 years, the States have really been sort of up against a wall with ASARCO and Woolworth and really losing large amounts of income out of the base. I think if you give the apportionment formula a chance to work, that the States will see that it has got to be used, particularly if all income in the base --

QUESTION: They will simply have to be reasonable; even if they weren't, they could get away with taxing more.

MS. HAMILL: Well, I don't think the world will ever be the same after ASARCO and Woolworth, and I think the States have learned a lesson. You can't be too piggy. You have really got to realize that in some cases where there is recurring -- a huge, huge investment portfolio with none of the, none of the generative assets in the formula may very well create distortion.

But the States can and should deal with that. This Court can deal with it --

QUESTION: That will be our principle, you can tax whatever you like, but don't be too piggy.

(Laughter.)

MS. HAMILL: I think the Court --

QUESTION: That will put the fear of the Lord in them.

(Laughter.)

MS. HAMILL: Again, though, I think that you ought to give the apportionment formula a chance to work and it may very well work, and you may though have a couple of apportionment cases where a State is being piggy and refuses to see the light, refuses to make any --

QUESTION: How do we decide then if it is being too piggy without some rules?

MS. HAMILL: I think that courts have managed to do it. Judge Cardozo sitting on the New York Court of Appeals had no trouble --

QUESTION: We thought that we had managed to do it already.

MS. HAMILL: You did, you certainly did. There is no question that ASARCO and Woolworth in one sense, they are a very workable rule, they just plain --

QUESTION: Sort of workable I think.

MS. HAMILL: They just limit the States -- but they limit it in this unreal fashion and truly unreal fashion, as I think Justice Kennedy is pointing out. Nothing to do with the way corporations are --

QUESTION: You mentioned Justice Cardozo; he said, life in all its fullness must provide the answer to the riddle. He had not read the three-factor formula.

(Laughter.)

QUESTION: And I am concerned about the three-factor formula because it has a manufacturing bias, which is the very basis for your attack on the unitary system.

MS. HAMILL: Right.

QUESTION: So it seems to me that we are really destroying the unitary formula, but leaving intact as a protection against overreaching, the apportionment formula which has the same defect.

MS. HAMILL: Well, if we were a congressional committee, we could fix it all at once, but I think you are absolutely right. I think the apportionment formula is probably as outdated as Fargo v. Hart and Pullman's Palace Car. But we don't have that issue here --

QUESTION: One thing at a time, Ms. Hamill.

MS. HAMILL: That's right, I am saying one thing at a time, you can't --

QUESTION: You are relentless.

MS. HAMILL: Bendix has given up. Bendix gave up on the apportionment formula. We argued, in fact, in the tax court of New Jersey, Bendix said, okay, if it's unitary you have to put the factors of ASARCO into the apportionment formula.

We said, that is not appropriate because these are minority stock investments and this is not a combined report. But we do think that it ought to be tested by putting the value of the ASARCO stock, the intangible value into the property factor.

We already have the receipts in the denominator of the receipts factor, that is, the gain itself, in the denominator, by the way, of course, which lessens what New Jersey can tax.

We did the math. The State did the math. We determined that the tax differential was extremely small. Bendix never challenged those figures, never produced any evidence, never did a thing, and the New Jersey tax court ruled that Bendix had not succeeded in establishing any unfairness in the apportionment formula.

QUESTION: May I ask you a question about your basic theory, and I want to concentrate on the first point that your opponent made. Assume the hypothetical we talked about earlier with a geographically separate small operation in Florida, and a mammoth business, through 30 other States far out West, but no connection with that separate operation in Florida.

You think Florida has the power, because they have a very small operation in Florida that is totally unconnected with the rest of their business, to have access to all of their business records to compute the tax base and the tax should be paid. You don't find there's any jurisdictional problem. Florida provides no benefit whatsoever to 99.44 percent of their business.

MS. HAMILL: Are you asking whether they have the --

QUESTION: Under your approach --

MS. HAMILL: -- the power to get the tax records, or do you mean to include the income?

QUESTION: To include them in income and audit and do everything else, what is the -- are you troubled at all by the question of whether Florida in that situation would have the jurisdiction to base their tax collection on an operation so remote from what happened in Florida?

MS. HAMILL: No, because again I think if these activities are in a single corporation run by single management there are flows of value. And of course, the apportionment formula under your hypothetical is going to take care of problems --

QUESTION: I understand, there is nothing unfair --

MS. HAMILL: It is a tiny tax.

QUESTION: You could always treat every business as unitary, but in effect, isn't this a brand new concept of taxing power on the part of a State? The mere fact that they have set a foot 6 inches into the State jurisdiction gives that State the power to say, I want to look at everything you have done all over the world --

QUESTION: And apportion the entire --

QUESTION: And then apportion the whole thing. That doesn't trouble you at all?

MS. HAMILL: I think it is a step, it certainly is a step, but I don't think it is totally out of -- it is not an enormous step. It is a small step. The Court's cases, I mean, starting with Butler Brothers, which involved the wholesale distribution houses --

QUESTION: Right.

MS. HAMILL: Geographically separate, the one in California --

QUESTION: Yes, but the theory was you couldn't separate it in an accounting sense in order to do it in a meaningful way. I am assuming that all the accounting, and all the rest, is perfectly understandable on a local basis in Florida.

MS. HAMILL: Under that hypothetical, under my situation, we would still say you put it in the base, but you are going to have to do an adjustment somehow to the apportionment formula. But of course, we don't agree with your premise, which is that you can separate them --

QUESTION: That there can ever be a separate operation within a corporation.

MS. HAMILL: -- totally, totally, separate, that's right.

QUESTION: That the Butler case decided that all corporations are totally unitary under all circumstances, no matter how diverse their businesses --

MS. HAMILL: Well, no --

QUESTION: Anything that is under the same management.

MS. HAMILL: Is going to be --

QUESTION: Under the same ownership.

MS. HAMILL: Well, I think we would say it has to be the same management, I think we maybe misspoke a little bit --

QUESTION: Well, in that case, I have a separate manager in my Florida parking lot and then I don't apportion?

MS. HAMILL: But you have got a corporate president. You have got a corporate management that is saying, okay, we are going to put it in the parking lot or we are going to put it in the major operations that are in the West.

QUESTION: Then the same management is the same as the same ownership because every corporation has a chief executive officer.

MS. HAMILL: Yes, but I wouldn't want to say just management without putting in the fact that it's being -- that there are some people in there calling the shots and making it unitary.

QUESTION: What about the parent, the corporation that owns stock in a company that it doesn't really control, but it gets paid dividends? Is that corporation under the same management?

MS. HAMILL: Well --

QUESTION: Say they own 10 percent of a subsidiary -- this isn't a subsidiary at all. They just own 10 percent of a company that is very profitable and they have invested some money in it. Certainly, they are not under the same management.

MS. HAMILL: No, but the fact that they have bought that stock, that they think that stock is worth having and not selling, that they see -- corporations don't invest --

QUESTION: So you don't really care about unitary; you just -- as you say, any income that a corporation gets from any other corporation is apportionable by --

MS. HAMILL: We are saying it is defined differently, and we are trying to keep it, Justice White; we think it does apply in combined reporting situations.

QUESTION: So your same management test really doesn't -- except that, it is the same management that runs the rest of the company that decided to invest in this company.

MS. HAMILL: Yes, that's the Bendix, it is William Agee all over again doing exactly what he did. If I might I would like to turn very briefly to the question of retroactivity. If the Court should overrule ASARCO and Woolworth, we believe it should do so retroactively. We believe that ASARCO and Woolworth were not the kind of clear precedent on which litigants relied under the Chevron Oil test. No prior case had formulated an exclusive test of operating relationships between payor and payee. Corporate purpose had been sanctioned, indeed, in Adams Express Company the Court had said, quote, presumptively, all the property of the corporation is held and used for the purposes of its business, close quote.

One year after ASARCO and Woolworth were decided, the Court decided Container, it may have referred to ASARCO, not attacked it head-on, but the reasoning in Container in many, many respects undercuts ASARCO. The recognition that the California code tracks UDITPA and the definition of business and nonbusiness income is a subtle attack on the -- and the rejection of the corporate purpose doctrine in ASARCO and Woolworth because that corporate purpose doctrine really does come out of UDITPA. It may have been formulated in a rather generalized way, but it is the UDITPA test. It sanctions, Container sanctions a business purpose for making an investment unitary, and that is footnote 19 that talks about the purpose of making loans to the subsidiaries, again, totally different from ASARCO and Woolworth.

Container sanctions reliance on the potential to control; whereas, ASARCO and Woolworth required actual, operating control. Container sanctioned the presumption that companies engaged in similar lines of business are unitary, but Woolworth was engaged in exactly the same line of business as its subsidiaries, and ASARCO's subs were in segments of ASARCO's business. It rejects the bright line test that there must be flows of product, and it puts the burden of proof back on to the taxpayer, and if you read ASARCO it is quite clear that all the gaps, all the deficiencies in the record were construed against the State.

So Container undercut ASARCO and Woolworth and after Container no corporate taxpayer had a legitimate reliance interest in ASARCO and Woolworth. And then of course, ASARCO and Woolworth have provoked repeated litigation in the State courts. The lower courts tried to square those rulings with their notions of common sense, tried to follow them and had a very difficult time doing it.

We think the prospective application would not further a new rule of law. We have been hurt by the ASARCO/Woolworth rule. We, the State's fisc -- the State's sovereign ability to tax, as long as it doesn't violate the Constitution and to promote, to have a new rule and then not let us have the benefit of it retroactively would be very harmful to New Jersey. The equities, for a similar reason favor, we think, retroactive overruling.

QUESTION: Ms. Hamill, I have -- do you propose that your theory applies only to a corporation in Florida, for example, that is majority owned by the New Jersey corporation that you are taxing?

MS. HAMILL: No.

QUESTION: 10 percent?

MS. HAMILL: Absolutely, 1 percent, because it is not, you see, this control. It is the way it is used. It is the way the investment is used.

To conclude, very briefly, again, I think Allied is trying to paint New Jersey as taking a very radical position. It relies on cases decided a century ago, but we have repeatedly pointed out in this case, this not the way companies operate today. Today they use their investments interchangeably with their manufacturing assets. The days of Pullman's Palace Car, Adams Express Company and Fargo v. Hart are gone forever. There is nothing wrong with the unitary business principle, but it has to be brought into the modern world. The Court will look in vain through everything that Allied has said about how companies invest, how they act, how they really manage these investments, and there is nothing there.

What they want is a constitutional formulary that has nothing to do with present-day economic reality. And what we are proposing is a rule that we think is consistent with economic reality, that is clear and predictable, and that is consistent with the due process clause and puts the issue of the division of the tax base where it belongs, which is under the apportionment formula.

Thank you.

QUESTION: Thank you, Ms. Hamill.

Mr. Hellerstein, you have 5 minutes remaining.

REBUTTAL ARGUMENT OF WALTER HELLERSTEIN ON BEHALF OF THE PETITIONER

MR. HELLERSTEIN: I would like to make three points and given my experience in the first 25 minutes, I had better make my first two fast.

Ms. Hamill seems to ignore the commerce clause, that is, ignore the problem, or I guess acknowledge that there simply will be multiple taxation. This is simply a fact of life. Well, it may be a fact of life that New Jersey is willing to live with, but it is certainly a fact of life that the Court has not permitted, that is terribly destructive to the underlying purposes of the commerce clause, namely to prevent multiple taxation.

And indeed, her suggestion that because there is an exclusion for dividends, that this is a nonproblem, fails to recognize the fact that in this very case we are dealing with capital gains; fails to recognize the fact that under her regime it is not just intangibles we are talking about, we are talking about all income. Income from sales of tangibles, it doesn't matter, it all goes into the tax base, and therefore there is going to be multiple taxation resulting from the continuing existence of the 30-odd States that have the business/nonbusiness income distinction and States like New Jersey.

Second, the 30 years that we have been living with UDITPA in which in fact the States have worked out these relatively workable rules, indeed, Ms. Hamill has conceded, at least for some purposes, that ASARCO and Woolworth are workable. She says they are workable, at least they are workable for the 34 other States that don't want to do what New Jersey does. She wants to leave intact a system in which the preexisting unitary business principle exists for 34 States but not for New Jersey. What will that mean? Think of the kinds of substance versus form problems you would have.

For example, if you have a situation, going back to our parking lot, the parking lot is in California. The beauty parlor is in New Jersey. Under her regime, if you put the parking lot into a separate subsidiary, New Jersey cannot tax it. Why? Because there is no unitary connection under traditional principles.

Now suppose you take that parking lot, you dissolve it into the beauty parlor corporation. Now miraculously, New Jersey's power to tax expands. The Constitution does not permit this kind of form over substance result. It is simply indefensible.

The notion that -- with respect to the retroactivity point, that Allied may not have relied on this case is simply irrelevant to the question of whether or not, if this Court should determine that ASARCO and Woolworth should be overruled, whether or not it should be applied retroactively or prospectively. Under the Chevron test it is quite clear, from Justice Souter's opinion in which the Court joined in the judgment that selective prospectivity is unacceptable, and clearly this Court cannot decide this case on a retroactive, prospective basis based on whether or not a particular taxpayer relied.

It is obviously whether the taxpayers in general have relied on ASARCO and Woolworth and to suggest that this establishes, that this does not establish a new principle of law and that somehow we were to glean from Container, which actually reaffirmed, spoke favorably of ASARCO and Woolworth, that it was becoming eroded or discredited is simply contrary to common sense.

New Jersey also completely fails to appreciate the complexity and chaos that will result from her approach. The problem of having the tax base be congruent to the underlying apportionment factors is serious enough without the complication of sweeping wholly unrelated assets and wholly unrelated businesses into a single apportionable tax base.

Under New Jersey's regime, New Jersey would retain the same three-factor formula regardless of the differences of the businesses. You could have, for example, an advertising business and a steel business under the same corporate roof, steel business, capital intensive, all of its property based in the steel mills would outweigh the advertising business, which was generated largely by payroll, say, in New York.

The result would be complete misattribution of income without a serious look at what the underlying factors of the apportionment formula provided. This would require the Court to become embroiled in the very controversies that presumably it thought it was getting out of over the last 10 years in developing these workable principles.

ASARCO goes back 100 years, and not on a discredited basis. The unitary business principle has been there for 100 years, has involved intangible property. There was no issue in Fargo v. Hart as to the particular tangible property.

It was because intangibles were --

Thank you, Mr. Chief Justice.

CHIEF JUSTICE REHNQUIST: Thank you, Mr. Hellerstein.

The case is submitted.

(Whereupon, at 1:59 p.m. the case in the above-entitled matter was submitted.)