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

Text File | 1992-06-14 | 35.5 KB | 672 lines

NOTICE: This opinion is subject to formal revision before publication in the
preliminary print of the United States Reports.  Readers are requested to
notify the Reporter of Decisions, Supreme Court of the United States, Wash-
ington, D.C. 20543, of any typographical or other formal errors, in order that
corrections may be made before the preliminary print goes to press.
SUPREME COURT OF THE UNITED STATES
--------
No. 91-615
--------
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 Kennedy delivered the opinion of the Court.
  Among the limitations the Constitution sets on the power
of a single State to tax the multi-state income of a nondo-
miciliary corporation are these: there must be -a `minimal
connection' between the interstate activities and the taxing
State,- Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445
U. S. 425, 436-437 (1980) (quoting Moorman Mfg. Co. v.
Bair, 437 U. S. 267, 273 (1978)), and there must be a
rational relation between the income attributed to the
taxing State and the intrastate value of the corporate
business.  445 U. S., at 437.  Under our precedents, a State
need not attempt to isolate the intrastate income-producing
activities from the rest of the business; it may tax an
apportioned sum of the corporation's multistate business if
the business is unitary.  E.g. ASARCO Inc. v. Idaho State
Tax Comm'n, 458 U. S. 307, 317 (1982).  A State may not
tax a nondomiciliary corporation's income, however, if it is
-derive[d] from `unrelated business activity' which consti-
tutes a `discrete business enterprise.'-  Exxon Corp. v.
Wisconsin Dept. of Revenue, 447 U. S. 207, 224 (1980)
(quoting Mobil Oil, supra, at 442, 439).  This case presents
the questions: (1) whether the unitary business principle
remains an appropriate device for ascertaining whether a
State has transgressed its constitutional limitations; and if
so, (2) whether, under the unitary business principle, the
State of New Jersey has the constitutional power to include
in petitioner's apportionable tax base certain income which,
petitioner maintains, was not generated in the course of its
unitary business.
                            I
  Petitioner Allied-Signal, Inc., is the successor-in-interest
to the Bendix Corporation (Bendix).  The present dispute
concerns Bendix's corporate business tax liability to the
State of New Jersey for the fiscal year ending September
30, 1981.  Although three items of income were contested
earlier, the controversy in this Court involves only one item:
the gain of $211.5 million realized by Bendix on the sale of
its 20.6% stock interest in ASARCO Inc. (ASARCO).  The
case was submitted below on stipulated facts, and we begin
with a summary.
  During the times in question, Bendix was a Delaware
corporation with its commercial domicile and corporate
headquarters in Michigan.  Bendix conducted business in
all 50 States and 22 foreign countries.  App. 154.  Having
started business in 1929 as a manufacturer of aviation and
automotive parts, from 1970 through 1981, Bendix was
organized in four major operating groups: automotive;
aerospace/electronics; industrial/energy; and forest products.
Id., at 154-155.  Each operating group was under separate
management, but the chief executive of each group reported
to the chairman and chief executive officer of Bendix.  Id.,
at 155.  In this period Bendix's primary operations in New
Jersey were the development and manufacture of aerospace
products.  Id., at 161.
  ASARCO is a New Jersey corporation with its principal
offices in New York.  It is one of the world's leading
producers of nonferrous metals, treating ore taken from its
own mines and ore it obtains from others.  Id., at 163-164.
From December 1977 through November 1978, Bendix
acquired 20.6% of ASARCO's stock by purchases on the
open market.  Id., at 165.  In the first half of 1981, Bendix
sold its stock back to ASARCO, generating a gain of $211.5
million.  Id., at 172.  The issue before us is whether New
Jersey can tax an apportionable part of this income.
  Our determination of the question whether the business
can be called -unitary,- see infra, at ___-___, is all but
controlled by the terms of a stipulation between the
taxpayer and the State.  They stipulated: -During the
period that Bendix held its investment in ASARCO, Bendix
and ASARCO were unrelated business enterprises each of
whose activities had nothing to do with the other.-  Id., at
169.  Furthermore,
-[p]rior to and after its investment in ASARCO, no
business or activity of Bendix (in New Jersey or
otherwise), either directly or indirectly (other than the
investment itself), was involved in the nonferrous metal
production business or any other business or activity
(in New Jersey or otherwise) in which ASARCO was
involved.  On its part, ASARCO had no business or
activity (in New Jersey or otherwise) which, directly or
indirectly, was involved in any of the businesses or
activities (in New Jersey or otherwise) in which Bendix
was involved.  None of ASARCO's activities, businesses
or income (in New Jersey or otherwise) were related to
or connected with Bendix's activities, business or
income (in New Jersey or otherwise).-  Id., at 164-165.

  The stipulation gives the following examples of the
independence of the businesses:
      -There were no common management, officers, or
employees of Bendix and Asarco.  There was no use by
Bendix of Asarco's corporate plant, offices or facilities
and no use by Asarco of Bendix's corporate plant,
offices or facilities.  There was no rent or lease of any
property by Bendix from Asarco and no rent or lease of
any property by Asarco from Bendix.  Bendix and
Asarco were each responsible for providing their own
legal services, contracting services, tax services, finance
services and insurance.  Bendix and Asarco had
separate personnel and hiring policies . . . and separate
pension and employee benefit plans.  Bendix did not
lend monies to Asarco and Asarco did not lend monies
to Bendix.  There were no joint borrowings by Bendix
and Asarco.  Bendix did not guaranty any of Asarco's
debt and Asarco did not guaranty any of Bendix's debt.
Asarco had no representative on Bendix's Board of
Directors.  Bendix did not pledge its Asarco stock.  As
far as can be determined there were no sales of product
by Asarco itself to Bendix or by Bendix to Asarco.
Three were certain sales of product in the ordinary
course of business by Asarco subsidiaries to Bendix but
these sales were minute compared to Asarco's total
sales . . . .  These open market sales were at arms
length prices and did not come about due to the Bendix
investment in Asarco.  There were no transfers of
employees between Bendix and Asarco.-  Id., at
169-171.

  While Bendix held its ASARCO stock, ASARCO agreed to
recommend that two seats on the 14-member ASARCO
Board of Directors be filled by Bendix representatives.  The
seats were filled by Bendix chief executive officer W.M.
Agee and a Bendix outside director.  Id., at 168.  Nonethe-
less, -Bendix did not exert any control over ASARCO.-
Ibid.
  After respondent assessed Bendix for taxes on an appor-
tioned amount which included in the base the gain realized
upon Bendix's disposition of its ASARCO stock, Bendix sued
for a refund in New Jersey Tax Court.  The case was
decided based upon the stipulated record we have described,
and the Tax Court held that the assessment was proper.
Bendix Corp. v. Taxation Div. Director, 10 N.J. Tax 46
(1988).  The Appellate Division affirmed, Bendix Corp. v.
Director, Div. of Taxation, 237 N.J. Super. 328, 568 A.2d 59
(1989), and so, in turn, did the New Jersey Supreme Court.
Bendix Corp. v. Director, Div. of Taxation, 125 N.J. 20, 592
A.2d 536 (1991).
  The New Jersey Supreme Court held it was constitutional
to consider the gain realized from the sale of the ASARCO
stock as earned in Bendix's unitary business, drawing from
our decision in Container Corp. of America v. Franchise Tax
Bd., 463 U. S. 159, 166 (1983), the principle that -the
context for determining whether a unitary business exists
has, as an overriding consideration, the exchange or
transfer of value, which may be evidenced by functional
integration, centralization of management, and economies
of scale.-  125 N.J., at 34, 592 A.2d, at 543-544.  The New
Jersey Supreme Court went on to state: -The tests for
determining a unitary business are not controlled, however,
by the relationship between the taxpayer recipient and the
affiliate generator of the income that becomes the subject of
State tax.-  Id., at 35, 592 A.2d, at 544.  Based upon
Bendix documents setting out corporate strategy,  the court
found that the acquisition and sale of ASARCO -went well
beyond . . . passive investments in business enterprises,-
id., at 36, 592 A.2d, at 544, and Bendix -essentially had a
business function of corporate acquisitions and divestitures
that was an integral operational activity.-  Ibid.  As support
for its conclusion that the proceeds from the sale of the
ASARCO stock were attributable to a unitary business, the
New Jersey Supreme Court relied in part on the fact that
Bendix intended to use those proceeds in what later proved
to be an unsuccessful bid to acquire Martin Marietta, a
company whose aerospace business, it was hoped, would
complement Bendix's aerospace/electronics business.  Id., at
36, 592 A.2d, at 545.
  We granted certiorari.  502 U. S. ___ (1991).  At the
initial oral argument in this case New Jersey advanced the
proposition that all income earned by a nondomiciliary
corporation could be apportioned by any State in which the
corporation does business.  To understand better the
consequences of this theory we requested rebriefing and
reargument.  Our order asked the parties to address three
questions:
``1. Should the Court overrule ASARCO Inc. v. Idaho
State Tax Comm'n, 458 U. S. 307 (1982), and F. W.
Woolworth Co. v. Taxation and Revenue Dept. of New
Mexico, 458 U. S. 354 (1982)?
``2. If ASARCO and Woolworth were overruled, should
the decision apply retroactively?
``3. If ASARCO and Woolworth were overruled, what
constitutional principles should govern state taxation
of corporations doing business in several states?''  503
U. S. ___ (1992).

Because we give a negative answer to the first question, see
infra, at ___-___, we need not address the second and third.
                           II
  The principle that a State may not tax value earned
outside its borders rests on the fundamental requirement of
both the Due Process and Commerce Clauses that there be
-some definite link, some minimum connection, between a
state and the person, property or transaction it seeks to
tax.-  Miller Bros. Co. v. Maryland, 347 U. S. 340, 344-345
(1954).  The reason the Commerce Clause includes this
limit is self-evident: in a Union of 50 States, to permit each
State to tax activities outside its borders would have drastic
consequences for the national economy, as businesses could
be subjected to severe multiple taxation.  But the Due
Process Clause also underlies our decisions in this area.
Although our modern due process jurisprudence rejects a
rigid, formalistic definition of minimum connection, see
Quill Corp. v. North Dakota, 504 U. S. ___, ___-___ (1992),
we have not abandoned the requirement that, in the case of
a tax on an activity, there must be a connection to the
activity itself, rather than a connection only to the actor the
State seeks to tax.  See id., at ___ (quoting Miller Bros.,
supra, at 344-345).  The constitutional question in a case
such as Quill Corp. is whether the State has the authority
to tax the corporation at all.  The present inquiry, by
contrast, focuses on the guidelines necessary to circum-
scribe the reach of the State's legitimate power to tax.  We
are guided by the basic principle that the State's power to
tax an individual's or corporation's activities is justified by
the -protection, opportunities and benefits- the State
confers on those activities.  Wisconsin v. J.C. Penney Co.,
311 U. S. 435, 444 (1940).
  Because of the complications and uncertainties in
allocating the income of multistate businesses to the several
States, we permit States to tax a corporation on an appor-
tionable share of the multistate business carried on in part
in the taxing State.  That is the unitary business principle.
It is not a novel construct, but one which we approved
within a short time after the passage of the Fourteenth
Amendment's Due Process Clause.  We now give a brief
summary of its development.
  When States attempted to value railroad or telegraph
companies for property tax purposes, they encountered the
difficulty that what makes such a business valuable is the
enterprise as a whole, rather than the track or wires which
happen to be located within a State's borders.  The Court
held that, consistent with the Due Process Clause, a State
could base its tax assessments upon -the proportionate part
of the value resulting from the combination of the means by
which the business was carried on, a value existing to an
appreciable extent throughout the entire domain of opera-
tion.-  Adams Express Co. v. Ohio State Auditor, 165 U. S.
194, 220-221 (1897) (citing Western Union Telegraph Co. v.
Massachusetts, 125 U. S. 530 (1888); Massachusetts v.
Western Union Telegraph Co., 141 U. S. 40 (1891); Maine v.
Grand Trunk R. Co., 142 U. S. 217 (1891); Pittsburgh, C.,
C., & S.L. R. Co. v. Backus, 154 U. S. 421 (1894); Cleveland,
C., C., & S.L. R. Co. v. Backus, 154 U. S. 439 (1894);
Western Union Telegraph Co. v. Taggart, 163 U. S. 1 (1896);
Pullman's Palace Car Co. v. Pennsylvania, 141 U. S. 18
(1891).
  Adams Express recognized that the principles which
permit a State to levy a tax on the capital stock of a
railroad, telegraph, or sleeping car company by reference to
its unitary business also allow proportional valuation of a
unitary business in enterprises of other sorts.  As the Court
explained: -The physical unity existing in the former is
lacking in the latter; but there is the same unity in the use
of the entire property for the specific purpose, and there are
the same elements of value arising from such use.-  165
U. S., at 221.
  The unitary business principle was later permitted for
state taxation of corporate income as well as property and
capital.  Thus, in Underwood Typewriter Co. v. Chamber-
lain, 254 U. S. 113, 120-121 (1920), we explained:
-The profits of the corporation were largely earned by
a series of transactions beginning with manufacture in
Connecticut and ending with sale in other States.  In
this it was typical of a large part of the manufacturing
business conducted in the State.  The legislature in
attempting to put upon this business its fair share of
the burden of taxation was faced with the impossibility
of allocating specifically the profits earned by the
processes conducted within its borders.  It, therefore,
adopted a method of apportionment which, for all that
appears in this record, reached, and was meant to
reach, only the profits earned within the State.-

  As these cases make clear, the unitary business rule is a
recognition of two imperatives: the States' wide authority to
devise formulae for an accurate assessment of a corpora-
tion's intrastate value or income; and the necessary limit on
the States' authority to tax value or income which cannot in
fairness be attributed to the taxpayer's activities within the
State.  It is this second component, the necessity for a
limiting principle, that underlies this case.
  As we indicated in Mobil Oil Corp. v. Commissioner of
Taxes, 445 U. S., at 442: -Where the business activities of
the dividend payor have nothing to do with the activities of
the recipient in the taxing State, due process considerations
might well preclude apportionability, because there would
be no underlying unitary business.-  The constitutional
question becomes whether the income -derive[s] from
`unrelated business activity' which constitutes a `discrete
business enterprise.'-  Exxon Corp. v. Wisconsin Dept. of
Revenue, 447 U. S. 207, 224 (1980) (quoting Mobil Oil,
supra, at 442, 439).
  Although Mobil Oil and Exxon made clear that the
unitary business principle limits the States' taxing power,
it was not until our decisions in ASARCO Inc. v. Idaho
State Tax Comm'n, 458 U. S. 307 (1982), and F.W. Wool-
worth Co. v. Taxation and Revenue Dept. of N.M., 458 U. S.
354 (1982), that we struck down a state attempt to include
in the apportionable tax base income not derived from the
unitary business.  In those cases the States sought to tax
unrelated business activity.
  The principal question in ASARCO concerned Idaho's
attempt to include in the apportionable tax base of
ASARCO certain dividends received from, among other
companies, the Southern Peru Copper Corp.  458 U. S., at
309, 320.  The analysis is of direct relevance for us because
we have held that for constitutional purposes capital gains
should be treated as no different from dividends.  Id., at
330.  The ASARCO in the 1982 case was the same company
as the ASARCO here.  It was one of four of Southern Peru's
shareholders, owning 51.5% of its stock.  Under an agree-
ment with the other shareholders, ASARCO was prevented
from dominating Southern Peru's board of directors.
ASARCO had the right to appoint 6 of Southern Peru's 13
directors, while 8 votes were required for the passage of any
resolution.  Southern Peru was in the business of producing
unrefined copper (a nonferrous ore), some of which it sold
to its shareholders.  ASARCO purchased approximately
35% of Southern Peru's output, at average representative
trade prices quoted in a trade publication and over which
neither Southern Peru nor ASARCO had any control.  Id.,
at 320-322.  We concluded that -ASARCO's Idaho silver
mining and Southern Peru's autonomous business [were]
insufficiently connected to permit the two companies to be
classified as a unitary business.-  Id., at 322.
  On the same day we decided ASARCO, we decided
Woolworth.  In that case, the taxpayer company was
domiciled in New York and operated a chain of retail
variety stores in the United States.  In the company's
apportionable state tax base, New Mexico sought to include
earnings from four subsidiaries operating in foreign
countries.  The subsidiaries also engaged in chainstore
retailing.  Woolworth, supra, at 356-357.  We observed that
although the parent company had the potential to operate
the subsidiaries as integrated divisions of a single unitary
business, that potential was not significant if the subsidiar-
ies in fact comprise discrete business operations.  Id., at
362.  Following the indicia of a unitary business defined in
Mobil Oil, we inquired whether any of the three objective
factors were present.  The factors were: (1) functional
integration; (2) centralization of management; and (3)
economies of scale.  Woolworth, supra, at 364.  We found
that -[e]xcept for the type of occasional oversight - with
respect to capital structure, major debt, and dividends -
that any parent gives to an investment in a subsidiary,- id.,
at 369, none of these factors was present.  The subsidiaries
were found not to be part of a unitary business.  Ibid.
  Our most recent case applying the unitary business
principle was Container Corp. of America v. Franchise Tax
Bd., 463 U. S. 159 (1983).  The taxpayer there was a
vertically integrated corporation which manufactured
custom-ordered paperboard packaging.  Id., at 171.
California sought to tax income it received from its wholly
owned and mostly owned foreign subsidiaries, each of which
was in the same business as the parent.  Id., at 171-172.
The foreign subsidiaries were given a fair degree of autono-
my: they purchased only 1% of their materials from the
parent and personnel transfers from the parent to the
subsidiaries were rare.  Id., at 172.  We recognized, how-
ever:
-[I]n certain respects, the relationship between appel-
lant and its subsidiaries was decidedly close.  For
example, approximately half of the subsidiaries' long-
term debt was either held directly, or guaranteed, by
appellant.  Appellant also provided advice and consul-
tation regarding manufacturing techniques, engineer-
ing, design, architecture, insurance, and cost account-
ing to a number of its subsidiaries, either by entering
into technical service agreements with them or by
informal arrangement.  Finally, appellant occasionally
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.-  Id., at 173.

Based on these facts, we found that the taxpayer had not
met its burden of showing by -```clear and cogent evi-
dence'''- that the State sought to tax extraterritorial values.
Id., at 175, 164 (quoting Exxon Corp., supra, at 221, in turn
quoting Butler Bros. v. McColgan, 315 U. S. 501, 507 (1942),
in turn quoting Norfolk  Western R. Co. v. North Carolina
ex rel. Maxwell, 297 U. S. 682, 688 (1936)).
  In the course of our decision in Container Corp., we
reaffirmed that the constitutional test focuses on functional
integration, centralization of management, and economies
of scale.  463 U. S., at 179 (citing Woolworth, supra, at 364;
Mobil Oil, supra, at 438).  We also reiterated that a unitary
business may exist without a flow of goods between the
parent and subsidiary, if instead there is a flow of value
between the entities.  Id., at 178.  The principal virtue of
the unitary business principle of taxation is that it does a
better job of accounting for -the many subtle and largely
unquantifiable transfers of value that take place among the
components of a single enterprise- than, for example,
geographical or transactional accounting.  Id., at 164-165
(citing Mobil Oil Corp., 445 U. S., at 438-439).
  Notwithstanding the Court's long experience in applying
the unitary business principle, New Jersey and several
amici curiae argue that it is not an appropriate means for
distinguishing between income generated within a State
and income generated without.  New Jersey has not
persuaded us to depart from the doctrine of stare decisis by
overruling our cases which announce and follow the unitary
business standard.  In deciding whether to depart from a
prior decision, one relevant consideration is whether the
decision is -unsound in principle.-  Garcia v. San Antonio
Metropolitan Transit Authority, 469 U. S. 528, 546 (1985).
Another is whether it is -unworkable in practice.-  Ibid.
And, of course, reliance interests are of particular relevance
because -[a]dherence to precedent promotes stability,
predictability, and respect for judicial authority.-  Hilton v.
South Carolina Public Railways Comm'n, 502 U. S. ___, ___
(1991) (citing Vasquez v. Hillery, 474 U. S. 254, 265-266
(1986)).  See also Quill Corp. v. North Dakota, 504 U. S., at
___ (industry's reliance justifies adherence to precedent);
id., at ___ (Scalia, J., concurring in part and concurring in
judgment) (same).  Against this background we address the
arguments of New Jersey and its amici.
  New Jersey contends that the unitary business principle
must be abandoned in its entirety, arguing that a nondom-
iciliary State should be permitted -to apportion all the
income of a separate multistate corporate taxpayer.-  Brief
for Respondent on Reargument 27.  According to New
Jersey, the unitary business principle does not reflect
economic reality, while its proposed theory does.  We are
not convinced.
  New Jersey does not appear to dispute the basic proposi-
tion that a State may not tax value earned outside its
borders.  It contends instead that all income of a corpora-
tion doing any business in a State is, by virtue of common
ownership, part of the corporation's unitary business and
apportionable.  See Tr. of Oral Arg. 25-26 (Apr. 22, 1992).
New Jersey's sweeping theory cannot be reconciled with the
concept that the Constitution places limits on a State's
power to tax value earned outside of its borders.  To be
sure, our cases give States wide latitude to fashion formu-
lae designed to approximate the instate portion of value
produced by a corporation's truly multistate activity.  But
that is far removed from New Jersey's theory that any
business in the State, no matter how small or unprofitable,
subjects all of a corporation's out-of-state income, no matter
how discrete, to apportionment.
  According to New Jersey, Brief for Respondent on
Reargument 11, there is no logical distinction between short
term investment of working capital, which all concede is
apportionable, see Reply Brief for Petitioner on Reargument
4-5 and n.3; Tr. of Oral Arg. 7-8 (Apr. 22, 1992); Container
Corp., 463 U. S., at 180, n.19, and all other investments.
The same point was advanced by the dissent in ASARCO,
458 U. S., at 337 (opinion of O'Connor, J.).  New Jersey's
basic theory is that multistate corporations like Bendix
regard all of their holdings as pools of assets, used for
maximum long-term profitability, and that any distinction
between operational and investment assets is artificial.  We
may assume, arguendo, that the managers of Bendix cared
most about the profits entry on a financial statement, but
that state of mind sheds little light on the question whether
in pursuing maximum profits they treated particular
intangible assets as serving, on the one hand, an invest-
ment function, or, on the other, an operational function.
See Container Corp., supra, at 180, n. 19.  That is the
relevant unitary business inquiry, one which focuses on the
objective characteristics of the asset's use and its relation
to the taxpayer and its activities within the taxing State.
It is an inquiry to which our cases give content, and which
is necessary if the limits of the Due Process and Commerce
Clauses are to have substance in a modern economy.  In
short, New Jersey's suggestion is not in accord with the
well-established and substantial case law interpreting the
Due Process and Commerce Clauses.
  Our precedents are workable in practice; indeed, New
Jersey conceded as much.  See Tr. of Oral Arg. 37-38 (Apr.
22, 1992).  If lower courts have reached divergent results in
applying the unitary business principle to different factual
circumstances, that is because, as we have said, any
number of variations on the unitary business theme -are
logically consistent with the underlying principles motivat-
ing the approach,- Container Corp., supra, at 167, and also
because the constitutional test is quite fact-sensitive.
  Indeed, if anything would be unworkable in practice, it
would be for us now to abandon our settled jurisprudence
defining the limits of state power to tax under the unitary
business principle.  State legislatures have relied upon our
precedents by enacting tax codes which allocate intangible
nonbusiness income to the domiciliary State, see App. to
Brief for Petitioner on Reargument 1a-7a (collecting
statutes).  Were we to adopt New Jersey's theory, we would
be required either to invalidate those statutes or authorize
what would be certain double taxation.  And, of course, we
would defeat the reliance interest of those corporations
which have structured their activities and paid their taxes
based upon the well-established rules we here confirm.
Difficult questions respecting the retroactive effect of our
decision would also be presented.  See James B. Beam
Distilling Co. v. Georgia, 501 U. S. ___ (1991).  New
Jersey's proposal would disrupt settled expectations in an
area of the law in which the demands of the national
economy require stability.
  Not willing to go quite so far as New Jersey, some amici
curiae urge us to modify, rather than abandon, the unitary
business principle.  See, e.g., Brief for Multistate Tax
Commission as Amicus Curiae; Brief for Multistate Tax
Commission as Amicus Curiae on Reargument; Brief for
Chevron Corporation as Amicus Curiae.  They urge us to
hold that the Constitution does not require a unitary
business relation between the payor and the payee in order
for a State to apportion the income the payee corporation
receives from an investment in the payor.  Rather, they
urge us to adopt as the constitutional test the standard set
forth in the business income definition in section 1(a) of the
Uniform Division of Income for Tax Purposes Act
(UDITPA), 7A U.L.A. 331, 336 (1985).  Under UDITPA,
-business income,- which is apportioned, is defined as:
-income arising from transactions and activity in the
regular course of the taxpayer's trade or business and
includes 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).  -Non-business
income,- which is allocated, is defined as -all income other
than business income.-  UDITPA 1(e).
  In the abstract, these definitions may be quite compatible
with the unitary business principle.  See Container Corp.,
supra, at 167 (noting that most of the relevant provisions of
the California statute under which we sustained the
challenged tax there were derived from UDITPA).  Further-
more, the unitary business principle is not so inflexible that
as new methods of finance and new forms of business
evolve it cannot be modified or supplemented where
appropriate.  It does not follow, though, that apportionment
of all income is permitted by the mere fact of corporate
presence within the State; and New Jersey offers little more
in support of the decision of the State Supreme Court.
  We agree that the payee and the payor need not be
engaged in the same unitary business as a prerequisite to
apportionment in all cases.  Container Corp. says as much.
What is required instead is that the capital transaction
serve an operational rather than an investment function.
463 U. S., at 180, n.19.  Hence, in ASARCO, although we
rejected the dissent's factual contention that the stock
investments there constituted -interim uses of idle funds
`accumulated for the future operation of [the taxpayer's]
business [operation],'- we did not dispute the suggestion
that had that been so the income would have been appor-
tionable.  458 U. S., at 325, n. 21.
  To be sure, the existence of a unitary relation between
the payor and the payee is one means of meeting the
constitutional requirement.  Thus, in ASARCO and Wool-
worth we focused on the question whether there was such
a relation.  We did not purport, however, to establish a
general requirement that there be a unitary relation
between the payor and the payee to justify apportionment,
nor do we do so today.
  It remains the case that -[i]n order to exclude certain
income from the apportionment formula, the company must
prove that `the income was earned in the course of activities
unrelated to [those carried out in the taxing] State.'-  Exxon
Corp. v. Wisconsin Dept. of Revenue, 447 U. S. 207, 223
(1980) (quoting  Mobil Oil Corp. v. Commissioner of Taxes,
445 U. S. 425, 439 (1980).  The existence of a unitary
relation between payee and payor is one justification for
apportionment, but not the only one.  Hence, for example,
a State may include within the apportionable income of a
nondomiciliary corporation the interest earned on short-
term deposits in a bank located in another state if that
income forms part of the working capital of the corpora-
tion's unitary business, notwithstanding the absence of a
unitary relationship between the corporation and the bank.
That circumstance, of course, is not at all presented here.
See infra, at ___.
                           III
  Application of the foregoing principles to the present case
yields a clear result: the stipulated factual record now
before us presents an even weaker basis for inferring a
unitary business than existed in either ASARCO or Wool-
worth, making this an a fortiori case.  There is no serious
contention that any of the three factors upon which we
focused in Woolworth were present.  Functional integration
and economies of scale could not exist because, as the
parties have stipulated, -Bendix and ASARCO were
unrelated business enterprises each of whose activities had
nothing to do with the other.-  App. 169.  Moreover, because
Bendix owned only 20.6% of ASARCO's stock, it did not
have the potential to operate ASARCO as an integrated
division of a single unitary business, and of course, even
potential control is not sufficient.  Woolworth, 458 U. S., at
362.  There was no centralization of management.
  Furthermore, contrary to the view expressed below by the
New Jersey Supreme Court, see 125 N.J., at 36-37, 592
A.2d, at 544-545, 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.
Indeed, in Container Corp. we noted the important distinc-
tion between a capital transaction which serves an invest-
ment function and one which serves an operational func-
tion.  463 U. S., at 180, n.19 (citing Corn Products Refining
Co. v. Commissioner, 350 U. S. 46, 50-53 (1955)).  If that
distinction is to retain its vitality, then, as we held in
ASARCO, the fact that a transaction was undertaken for a
business purpose does not change its character.  458 U. S.,
at 326.  Idaho had argued that intangible income could be
treated as earned in the course of a unitary business if the
intangible property which produced that income is -`ac-
quired, managed or disposed of for purposes relating or
contributing to the taxpayer's business.'-  Ibid. (quoting
Brief for Appellee 4).  In rejecting the argument we

observed:
      ``This definition of unitary business would destroy the
concept.  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
operations, including any investment made, in some
sense can be said to be `for purposes related to or
contributing to the [corporation's] business.'  When
pressed to its logical limit, this conception of the
`unitary business' limitation becomes no limitation at
all.''  458 U. S., at 326.

  Apart from semantics, we see no distinction between the
-purpose- test we rejected in ASARCO and the -ingrained
acquisition-divestiture policy- approach adopted by the New
Jersey Supreme Court.  125 N.J., at 36, 592 A.2d, at 544.
The hallmarks of an acquisition which is part of the
taxpayer's unitary business continue to be functional
integration, centralization of management, and economies
of scale.  Container Corp. clarified that these essentials
could respectively be shown by: transactions not undertaken
at arm's length, 463 U. S., at 180, n. 19; a management role
by the parent which is grounded in its own operational
expertise and operational strategy, ibid.; and the fact that
the corporations are engaged in the same line of business.
Id., at 178.  It is undisputed that none of these circumstanc-
es existed here.
  The New Jersey Supreme Court also erred in relying on
the fact that Bendix intended to use the proceeds of its gain
from the sale of ASARCO to acquire Martin Marietta.  Even
if we were to assume that Martin Marietta, once acquired,
would have been operated as part of Bendix's unitary
business, that reveals little about whether ASARCO was
run as part of Bendix's unitary business.  Nor can it be
maintained that Bendix's shares of ASARCO stock, which
it held for over two years, amounted to a short-term
investment of working capital analogous to a bank account
or certificate of deposit.  See Container Corp., supra, at 180,
n. 19; ASARCO, supra, at 325, n. 21.
  In sum, the agreed-upon facts make clear that under our
precedents New Jersey was not permitted to include the
gain realized on the sale of Bendix's ASARCO stock in the
former's apportionable tax base.
  The judgment of the New Jersey Supreme Court is
reversed, and the case is remanded for further proceedings
not inconsistent with this opinion.
                                      It is so ordered.