The Supreme Court/The Supreme Court.iso/pc/ascii/1991/91_615/91_615.zd

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SUPREME COURT OF THE UNITED STATES
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No. 91-615
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ALLIED-SIGNAL, INC., as successor-in-interest to
THE BENDIX CORPORATION, PETITIONER v.
DIRECTOR, DIVISION OF TAXATION
on writ of certiorari to the supreme
court of new jersey
[June 15, 1992]

  Justice O'Connor, with whom the Chief Justice,
Justice Blackmun, and Justice Thomas join, dissenting.
  In my view, petitioner has not shown by -clear and cogent
evidence- that its investment in ASARCO was not opera-
tionally related to the aerospace business petitioner
conducted in New Jersey.  Exxon Corp v. Wisconsin Dept. of
Revenue, 447 U. S. 207, 221 (1980) (internal quotation
marks omitted).  Though I am largely in agreement with
the Court's analysis, I part company on the application of
it here.
  I agree with the Court that we cannot adopt New Jersey's
suggestion that the unitary business principle be replaced
by a rule allowing a State to tax a proportionate share of all
the income generated by any corporation doing business
there.  See ante, at 12-13.  Were we to adopt a rule
allowing taxation to depend upon corporate identity alone,
as New Jersey suggests, the entire Due Process inquiry
would become fictional, as the identities of corporations
would fracture in a corporate shell game to avoid taxation.
Under New Jersey's theory, for example, petitioner could
avoid having its ASARCO investment taxed in New Jersey
simply by establishing a separate subsidiary to hold those
earnings outside New Jersey.  A constitutional principle
meant to insure that States tax only business activities they

can reasonably claim to have helped support should depend
on something more than manipulations of corporate
structure.  See Mobil Oil Corp. v. Commissioner of Taxes of
Vermont, 445 U. S. 425, 440 (1980) (-the form of business
organization may have nothing to do with the underlying
unity or diversity of business enterprise-); Fargo v. Hart,
193 U. S. 490 (1904) (refusing to find unitary business even
though single owner); Adams Express Co. v. Ohio State
Auditor, 165 U. S. 194, 222 (1897) (same).
  New Jersey suggests that we should presume that all the
holdings of a single corporation are mutually interde-
pendent because common ownership will stabilize profits
from the commonly held businesses, generating flows of
value between them that make them part of a unity.  While
it may be true that many corporations attempt to diversify
their holdings to avoid business cycles, we have refused to
presume a flow of value into an in-state business from the
potential benefits of being part of a larger multi-state,
multi-business corporation.  The reason for this is simple:
diversification may benefit the corporation as an entity
without necessarily affecting the business activity in the
taxing State and without requiring any support from the
taxing State.  See Wisconsin v. J.C. Penney Co., 311 U. S.
435, 444 (1940) (State may not tax where it has not -given
anything for which it can ask return-).
  I also agree with the Court that there need not be a
unitary relationship between the underlying business of a
taxpayer and the companies in which it invests in order for
a State to tax investment income.  See ante, at 16.  -[A]ctive
operational control- of the investment income payor by the
taxpayer is certainly not required, ASARCO Inc. v. Idaho
State Tax Comm'n, 458 U. S. 307, 343 (1982) (dissenting
opinion).  Insofar as a requirement that the investment
payor and payee be unitary was suggested by our decisions
in ASARCO, and F.W. Woolworth Co. v. Taxation and
Revenue Dept. of New Mexico, 458 U. S. 354 (1982), petition-
er concedes that was a -doctrinal foot fault.-  Reply Brief for
Petitioner on Reargument 4.  Although a unitary relation-
ship between the investment income payor and payee would
suffice to relate the investment income to the in-state
business, such a connection is not necessary.  Taxation of
investment income received from a nondomiciliary tax-
payer's investment in another corporation requires only
that the investment income be sufficiently related to the
taxpayer's in-state business, not that the taxpayer's
business and the corporation in which it invests be unitary.
Only when the State seeks to tax directly the income of a
nondomiciliary taxpayer's subsidiary or affiliate though
combined reporting, see Container Corp. of America v.
Franchise Tax Bd., 463 U. S. 159, 169, and n. 7 (1983),
must the underlying businesses of the taxpayer and its
affiliate or subsidiary be unitary.  In any case, the key
question for purposes of due process is whether the income
that the State seeks to tax is, by the time it is realized,
sufficiently related to a unitary business, part of which
operates in the taxing State.
  In this connection, I agree with the Court that out-of-
state investments serving an operational function in the
nondomiciliary taxpayer's in-state business are sufficiently
related to that business to be taxed.  In particular, I agree
that -`interim uses of idle funds ``accumulated for the future
operation of [the taxpayer's] business [operation],'''- may be
taxed.  Ante, at 16 (quoting ASARCO, supra, at 325, n. 21).
The Court, however, leaves -operational function- largely
undefined.  I presume that the Court's test allows taxation
in at least those circumstances in which it is allowed by the
Uniform Division of Income for Tax Purposes Act
(UDITPA).  Ante, at 15.  UDITPA counts as apportionable
business income from -tangible and intangible property if
the acquisition, management, and disposition of the
property constitute integral parts of the taxpayer's regular
trade or business operations.-  UDITPA 1(a), 7A U.L.A.
336 (1985) (emphasis added).  Presumably, investment
income serves an operational function if it is, to give only
some examples, intended to be used by the time it is
realized for making the business' anticipated payments; for
expanding or replacing plants and equipment; or for
acquiring other unitary businesses that will serve the in-
state business as stable sources of supply or demand, or
that will generate economies of scale or savings in adminis-
tration.
  In its application of these principles to this case, however,
I diverge from the Court's analysis.  The Court explains
that while -interest earned on short-term deposits in a bank
located in another State- may be taxed -if that income
forms part of the working capital of the corporation's
unitary business,- petitioner's longer-term investment in
ASARCO may not be taxed.  Ante, at 16.  The Court finds
the investment here not to be operational because it was
not analogous to a -short-term investment of working
capital analogous to a bank account or certificate of
deposit.-  Ante, at 18-19.
  Any distinction between short-term and long-term
investments cannot be of constitutional dimension.  Wheth-
er an investment is short-term or long-term, what matters
for due process purposes is whether the investment is
operationally related to the in-state business.  -The interim
investment of retained earnings prior to their commitment
to a major corporate project . . . merely recapitulates on a
grander scale the short-term investment of working capital
prior to its commitment to the daily financial needs of the
company.-  ASARCO, supra, at 338 (dissenting opinion).  I
see no distinction relevant to due process between investing
in a company in order to build capital to acquire a second
company related to the in-state business and, for example,
-leas[ing] for a term of years the areas of [the taxpayer's]
office buildings into which it intends ultimately to expand,-
which could hardly be claimed to set up a -separate and
unrelated leasing business.-  Id., at 338, n. 6.
  The link between the ASARCO investment here and the
in-state business is closer than the Court suggests.  It is not
just that the ASARCO investment was made to benefit
Bendix as a corporate entity.  As the Court points out, any
investment a corporation makes is intended to benefit the
corporation in general.  Ante, at 18.  The proper question is
rather:  Was the income New Jersey seeks to tax intended
to be used to benefit a unitary business of which Bendix's
New Jersey operations were a part?
  Petitioner has not carried the heavy burden of showing by
clear and cogent evidence that the capital gains from
ASARCO were not operationally related to its in-state
business.  See Container Corp., supra, at 175.  Though this
case comes to us on a stipulated record, there is no stipula-
tion that the ASARCO capital gains were not intended to be
used to benefit a unitary business, part of which operated
in New Jersey.  Instead, the record suggests that, by the
time the capital gains were realized, at least some of the
income was intended to be used in the attempt to acquire
a corporation also engaged in the aerospace industry.  App.
70-71, 81, 193.  The acquisition of Martin Marietta, had it
succeeded, would have been part of petitioner's unitary
aerospace business, part of which operated in New Jersey.
Id., at 194.  As the New Jersey Supreme Court found:
-[T]he purpose of acquiring Martin Marietta was to comple-
ment the aerospace-electronics facets of Bendix business,
some of which are located in New Jersey. . . . Even though
the Martin Marietta takeover never came to fruition, the
fact that it served as a goal for part of the capital generated
by the sales of ASARCO . . . stock nurtures the premise
that Bendix's ingrained policy of acquisitions and divesti-
tures projected the existence of a unitary business.-  Bendix
Corp. v. Director, Division of Taxation, 125 N.J. 20, 38, 592
A.2d 536, 545 (1991).  We will, -if reasonably possible, defer
to the judgment of state courts in deciding whether a
particular set of activities constitutes a `unitary business.'-
Container Corp., supra, at 175.  Because petitioner has
failed to show by clear and cogent evidence that the income
derived from the ASARCO investment was not related to
the operations of its unitary aerospace business, part of
which was in New Jersey, New Jersey should be able to
apportion and tax that income.  As the Court holds that it
may not, I must respectfully dissent.