ASARCO INC. v. IDAHO STATE TAX COMMISSION
No. 80-2015
Supreme Court of the United States
Argued April 19, 1982-Decided June 29, 1982
458 U.S. 307
George W. Beatty argued the cause for appellant. With him on the briefs were C. Rudolf Peterson, William L. Goldman, James A. Riedy, Philip E. Peterson, and Alexander J. Gillespie, Jr.
Theodore V. Spangler, Jr., Deputy Attorney General of Idaho, argued the cause for appellee. With him on the brief was David H. Leroy, Attorney General.*
JUSTICE POWELL delivered the opinion of the Court.
The question is whether the State of Idaho constitutionally may include within the taxable income of a nondomiciliary
*Briefs of amici curiae urging affirmance were filed for the State of Illinois by Tyrone Fahner, Attorney General, Fred H. Montgomery, Special Assistant Attorney General, and Lloyd B. Foster; and for the Multistate Tax Commission et al. by William D. Dexter; Wilson L. Condon, Attorney General of Alaska; J. D. MacFarlane, Attorney General of Colorado; Carl R. Ajello, Attorney General of Connecticut; Richard S. Gebelein, Attorney General of Delaware; David H. Leroy, Attorney General of Idaho, and Theodore V. Spangler, Jr., Deputy Attorney General; Linley E. Pearson, Attorney General of Indiana; Robert T. Stephan, Attorney General of Kansas; Stephen H. Sachs, Attorney General of Maryland; Francis X. Bellotti, Attorney General of Massachusetts; Frank K. Kelley, Attorney General of Michigan; Warren R. Spannaus, Attorney General of Minnesota; John Ashcroft, Attorney General of Missouri; Paul L. Douglas, Attorney General of Nebraska; Gregory H. Smith, Attorney General of New Hampshire; Jeff Bingaman, Attorney General of New Mexico; Rufus L. Edmisten, Attorney General of North Carolina, and M. C. Banks, Deputy Attorney General; Robert O. Welfald, Attorney General of North Dakota, and Albert R. Hausauer, Assistant Attorney General; Dave Frohnmayer, Attorney General of Oregon; and David L. Wilkinson, Attorney General of Utah. John J. Easton, Attorney General of Vermont, and Paul P. Hanlon filed a brief for the State of Vermont as amicus curiae.
I
This case involves corporate income taxes that appellee Idaho State Tax Commission sought to levy on appellant ASARCO Inc. for the years 1968, 1969, and 1970. ASARCO is a corporation that mines, smelts, and refines in various States nonferrous metals such as copper, gold, silver, lead, and zinc. It is incorporated in New Jersey and maintains its headquarters and commercial domicile in New York. ASARCO‘s primary Idaho business is the operation of a silver mine. It also mines and sells other metals and operates the administrative office of its northwest mining division in Idaho. According to the appellee‘s tax calculations, approximately 2.5% of ASARCO‘s total business activities take place in Idaho. App. 59a, 67a, and 75a.
During the years in question, ASARCO received three types of intangible income of relevance to this suit.1 First, it collected dividends from five corporations in which it owned major interests: M. I. M. Holdings, Ltd.; General Cable Corp.; Revere Copper and Brass, Inc.; ASARCO Mexicana, S. A.; and Southern Peru Copper Corp.2 Second,
ASARCO received interest income from three sources: from Revere‘s convertible debentures; from a note received in connection with a prior sale of Mexicana stock; and from a note received in connection with a sale of General Cable Stock. Third, ASARCO realized capital gains from the sale of General Cable and M. I. M. stock.
In 1965, Idaho adopted its version of the Uniform Division of Income for Tax Purposes Act (UDITPA).3 See
Idaho is a member of the Multistate Tax Compact, an interstate taxation agreement concerning state taxation of multistate businesses. The Compact established the Multistate Tax Commission, which is composed of the tax adminis-
In 1971, the Multistate Tax Commission audited ASARCO‘s tax returns for the years in question on behalf of six States, including Idaho. The auditor recommended adjusting ASARCO‘s tax computations in several respects. As accepted by the Idaho State Tax Commission and as relevant to the present dispute, the auditor first “unitized“-or treated as one single corporation-ASARCO and six of its wholly owned subsidiaries.8 As a consequence of unitization, the auditor combined ASARCO‘s income with that of these six subsidiaries and disregarded (as intracompany accounting transfers) the subsidiaries’ dividend payments to ASARCO. Cf. United States Steel Corp. v. Multistate Tax Comm‘n, supra, at 473, n. 25. The auditor listed five factors thought to justify unitizing treatment. First, ASARCO
The auditor found the situation to differ with respect to ASARCO‘s interest in M. I. M., General Cable, Revere, Mexicana, and Southern Peru. This judgment planted the seed of the current dispute. As to these five companies, the auditor determined that the links with ASARCO were not sufficient to justify unitary treatment. Nonetheless, he found that ASARCO‘s receipt of dividends from each of these did constitute “business” income to ASARCO. See n. 4, supra. The auditor similarly classified the interest and capital gains income at issue in this case. These categories of income also were added in ASARCO‘s total income to be apportioned among the various States in which ASARCO was subjected to an income tax.
The Idaho State Tax Commission adopted the auditor‘s ad-
On ASARCO‘s petition for review, the State District Court upheld the Commission‘s unitized treatment of the six subsidiaries in an unpublished opinion. The court, however, overruled the Commission‘s determination that the disputed dividends, interest, and capital gains constituted “business” income, on the reasoning that this income did not come from property or activities that were “an integral part of [ASARCO‘s] trade or business.”
The Commission, but not ASARCO, appealed to the Idaho Supreme Court. That court held that the trial court had erred by excluding from “business” income ASARCO‘s receipt of dividends, interest, and capital gains as a result of its owning stock in the five corporations.10 American Smelting
& Refining Co. v. Idaho State Tax Comm‘n, 99 Idaho 924, 935-937, 592 P. 2d 39, 50-52 (1979). In response to ASARCO‘s constitutional arguments, the court decided that this tax treatment withstood attack under the Commerce and Due Process Clauses. We vacated and remanded the case for reconsideration in light of our decision in Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425 (1980). ASARCO Inc. v. Idaho State Tax Comm‘n, 445 U.S. 939 (1980). The Idaho Supreme Court reinstated its previous opinion in a brief per curiam order on March 4, 1981. 102 Idaho 38, 624 P. 2d 946. We noted probable jurisdiction, 454 U.S. 812 (1981), and we now reverse.
II
As a general principle, a State may not tax value earned outside its borders. See, e. g., Connecticut General Life Ins. Co. v. Johnson, 303 U.S. 77, 80-81 (1938).11 The broad inquiry in a case such as this, therefore, is “whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return.” Wisconsin v. J. C. Penney Co., 311 U.S. 435, 444 (1940).
Our application of this general principle in this case is guided by two of our recent decisions. In Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, the taxpayer conducted “an integrated petroleum business,” 445 U.S., at 428,
For present purposes, our analysis in Mobil began with the observation that Mobil‘s principal dividend payors were part of Mobil‘s integrated petroleum business. Although Mobil was “unwilling to concede the legal conclusion” that activities by these dividend payors formed part of Mobil‘s “‘unitary business,‘” it “offered no evidence that would undermine the conclusion that most, if not all, of its subsidiaries and affiliates contribute[d] to [Mobil‘s] worldwide petroleum enterprise.” Id., at 435.
The Court next stated that due process limitations on Vermont‘s attempted tax would be satisfied if there were “a ‘minimal connection’ between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise.” Id., at 436-437, citing Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273 (1978); National Bellas Hess, Inc. v. Illinois Dept. of Revenue, 386 U.S. 753, 756 (1967); Norfolk & Western R. Co. v. Missouri Tax Comm‘n, 390 U.S. 317, 325 (1968). And we said that these limitations would not be contravened by state apportionment and taxation of income that were determined by geographic accounting to have arisen from a different State “so long as the intrastate and extrastate activities formed part of a single unitary business.” 445 U.S., at 438 (emphasis added).
“[T]he linchpin of apportionability in the field of state income taxation is the unitary-business principle. In accord with this principle, what appellant must show, in order to establish that its dividend income is not subject to an apportioned tax in Vermont, is that the income was earned in the course of activities unrelated to the sale of petroleum products in that State. [Mobil] has made no effort to demonstrate that the foreign operations of its subsidiaries and affiliates are distinct in any business or economic sense from its petroleum sales activities in Vermont. Indeed, all indications in the record are to the contrary, since it appears that these foreign activities are part of [Mobil‘s] integrated petroleum enterprise. In the absence of any proof of discrete business enterprise, Vermont was entitled to conclude that the dividend income‘s foreign source did not destroy the requisite nexus with in-state activities.” Id., at 439-440 (emphasis added and footnote omitted).
We consequently rejected Mobil‘s constitutional challenge to Vermont‘s tax. In so doing, however, we cautioned that we did
“not mean to suggest that all dividend income received by corporations operating in interstate commerce is necessarily taxable in each State where that corporation does business. 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.” Id., at 441-442 (emphasis added).
We soon had occasion to reiterate these principles. Three months after Mobil, we decided Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (1980). In Exxon, “a vertically integrated petroleum company,” id., at 210, explored for, produced, refined, and marketed petroleum and related products. Although Exxon‘s activities in Wisconsin were confined to marketing, the State sought to apportion and tax Exxon‘s income from nonmarketing activities in the United States.
Exxon disputed the propriety of this treatment. The Wisconsin Tax Appeals Commission agreed with the objection on the basis of its conclusion that Exxon‘s “three main functional operating departments-Exploration and Production, Refining, and Marketing-were separate unitary businesses.” Id., at 215 (emphasis added). The Commission found that the tax as applied “‘had the effect of imposing a tax on [Exxon‘s] exploration and on its refining net income, all of which was derived solely from operations outside the State of Wisconsin and which had no integral relationship to [Exxon‘s] marketing operations within Wisconsin.‘” Ibid. On appeal, however, the Circuit Court for Dane County held that Exxon‘s three main functional operating departments were all part of a single unitary business. The Wisconsin Supreme Court agreed.12
“‘In 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 the sale of petroleum products in that State.” . . . The court looks to the “underlying economic realities of a unitary business,” and the income must derive from “unrelated business activity” which constitutes a “discrete business enterprise,” 445 U.S., at 441, 442, 439.‘” 447 U.S., at 223-224.
Examining the facts, the Court found that Exxon was “a highly integrated business which benefits from an umbrella of centralized management and controlled interaction.” Id., at 224.13 We rejected the company‘s protest because “[w]e agree[d] with the Wisconsin Supreme Court that Exxon [was] such a unitary business and that Exxon has not carried
III
In this case, ASARCO claims that it has succeeded, where the taxpayers in Mobil and Exxon failed, in proving that the dividend payors at issue are not part of its unitary business, but rather are “discrete business enterprises.” 447 U.S., at 224. We must test this contention on the record before us.
A
The closest question is posed by ASARCO‘s receipt of dividends from Southern Peru. ASARCO is one of Southern Peru‘s four shareholders, holding 51.5% of its stock.15
ASARCO‘s majority interest, if asserted, could enable it to control the management of Southern Peru. The Idaho State
In its unreported opinion, the state trial court concluded that this management contract “insures that [ASARCO] will not be able to control [Southern Peru].” App. to Juris. Statement 43a. It likewise found that Southern Peru “operates independently of [ASARCO].” Id., at 42a. The court reached this conclusion after hearing testimony that ASARCO did not “control Southern Peru in any sense of that term,” App. 121a, and that Southern Peru did not “seek direction or approval from ASARCO on major decisions.” Id., at 124a. Idaho does not dispute any of these facts. In view of the findings and the undisputed facts, we conclude that ASARCO‘s Idaho silver mining and Southern Peru‘s autonomous business are insufficiently connected to permit the two companies to be classified as a unitary business.
B
Under the principles of our decisions, the relationship of each of the other four subsidiaries to ASARCO falls far short of bringing any of them within its unitary business. M. I. M. Holdings engages in the mining, milling, smelting, and refining of copper, lead, zinc, and silver in Australia. The company also operates a lead and zinc refinery in England. During the years in question M. I. M. sold only about 1%
“This company has been very successful in staffing the corporation with Australian people and [they have] been able to run this company by themselves and, therefore, in consequence of the nationalistic feeling which develops in most of such developing countries we have not exercised any right we might have to elect a director to the board of the company.” Id., at 132a.
In addition to forgoing its right to elect directors, ASARCO similarly has taken no part in the selection of M. I. M.‘s officers-a function of the board of directors. Nor do the two companies have any common directors or officers. Id., at 34a, 40a. The state trial court found that M. I. M. “operates entirely independently of and has minimal contact with” ASARCO. App. to Juris. Statement 43a. As the business relation also is nominal, it is clear that M. I. M. is merely an investment. See, e. g., Keesling & Warren, The Unitary Concept in the Allocation of Income, 12 Hastings L. J. 42, 52-53 (1960).
General Cable and Revere Copper, large publicly owned companies, fabricate metal products. Both are ASARCO customers.19 But ASARCO held only minority interests, own-
ing approximately 34% of the outstanding common shares of each. The remaining shares-listed on the New York Stock Exchange-are widely held. App. 135a. The two companies occupy parallel positions with respect to ASARCO as a result of a 1961 Department of Justice antitrust suit against ASARCO. The suit was based on ASARCO‘s interests in each. In 1967, ASARCO consented to a decree that prohibited it from maintaining common officers in these companies, voting its stock in them, selling the companies copper at prices below those quoted to their competition, and from acquiring stock in any other copper fabricator. Id., at 96a. Neither Revere‘s nor General Cable‘s management seeks direction or approval from ASARCO on operational or other management decisions.20 Id., at 137a.
Mexicana mines and smelts lead and copper in Mexico. Originally it was a wholly owned subsidiary of ASARCO, but a change in Mexican law required ASARCO to divest itself of 51% of Mexicana‘s stock in 1965. This stock is now publicly held by Mexican nationals. The record does not reveal whether ASARCO and Mexicana have any common directors. The state trial court found, however, that Mexicana “operates independently of [ASARCO],” App. to Juris. Statement 43a, and the Idaho Supreme Court stated that “Mexicana does not seek approval from ASARCO concerning major policy decisions . . . .” 99 Idaho, at 929, 592 P. 2d, at 44.21
C
Idaho does not dispute the foregoing facts. Neither does it question that a unitary business relationship between ASARCO and these subsidiaries is a necessary prerequisite to its taxation of the dividends at issue. E. g., Brief for Appellee 10 (“When income is earned from activities which are part of a unitary business conducted in several states, then the requirement that the income bear relation to the benefits and privileges conferred by the several states has been met“). See also Tr. of Oral Arg. 25 (“[W]hen intangible assets such as, for example, shares of stock, are found to be a part of a taxpayer‘s own unitary business, . . . there is no logical or constitutional reason why the income from those same intangibles should be treated any differently than any other business income that that taxpayer might earn“). Rather the State urges that we expand the concept of a “unitary business” to cover the facts of this case.22
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. When less ambitious interpretations are employed, the result is simply arbitrary.23
corporations involved in this case. Yet Idaho now agrees, as the courts below held, that on this record Lake Asbestos is not part of such a business. See Tr. of Oral Arg. 39.
ASARCO also received approximately $250,000 a year in dividends from Kennecott Copper Corp., and approximately $300,000 a year in dividends from Phelps Dodge. App. 52a. The record describes the business of these two corporations as the mining, smelting, refining, and sale of copper. Id., at 50a. ASARCO made sales in the range of $3-$5 million a year to Kennecott, and $24,000-$800,000 a year to Phelps Dodge. Id., at 27a. Each in turn made some (albeit “minimal“) sales to ASARCO. Id., at 43a-47a.
In light of this information, we have no basis for concluding that ASARCO did not “acquire” stock in Kennecott and Phelps Dodge “for purposes relating or contributing to the taxpayer‘s business.” Brief for Appellee 4. ASARCO‘s management scarcely would make such an admission. Yet Idaho makes no claim that Kennecott and Phelps Dodge are part of ASARCO‘s unitary business.
JUSTICE O‘CONNOR‘S dissent views the Court‘s decision as “prohibiting apportioned taxation of investment income by nondomiciliary states.” Post, at 345 et seq. This reflects a serious misunderstanding of our decision today and the cases on which we rely. The case we follow primarily is Mobil. It sustained the taxation of investment income after applying enunciated principles carefully to the facts of the case. In this case we have applied the same principles but have reached a different result because the facts differ in critical respects. As we have said elsewhere, the application of the unitary-business principle requires in each case a careful examination both of the way in which the corporate enterprise is structured and operates, and of the relationship with the taxing State.
Justice Holmes stated long ago that “the possession of bonds secured by mortgages of lands in other States, or of a land-grant in another State or of other property that adds to the riches of the corporation but does not affect the [taxing State‘s] part of the [business] is no sufficient ground for the increase of the tax—whatever it may be . . . .” Wallace v. Hines, 253 U.S. 66, 69-70 (1920). In this case, it is plain that the five dividend-paying subsidiaries “add to the riches” of ASARCO. But it is also true that they are “discrete business enterprise[s]” that—in “any business or economic sense“—have “nothing to do with the activities” of ASARCO in Idaho. Mobil, supra, at 439-442. Therefore there is no “rational relationship between the [ASARCO dividend] income attributed to the State and the intrastate values of the enterprise. Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273 (1978).” Mobil, supra, at 437. Idaho‘s attempt to tax a portion of these dividends can be viewed as “a mere effort to reach profits earned elsewhere under the guise of legitimate taxation.” Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm‘n, 266 U.S. 271, 283 (1924). The
IV
In addition to the disputed dividend income, Idaho also has sought to tax certain ASARCO interest and capital gains in-
Idaho and ASARCO agree that interest and capital gains income derived from these companies should be treated in the same manner as the dividend income.25 Brief for Appellant 27; Brief for Appellee 21. Cf. 99 Idaho, at 937, 592 P. 2d, at 52 (“In our view the same standard applies to the question whether gains from the sale of stock are business income as applies to the question whether dividends from the stock are business income“). We also agree. “One must look principally at the underlying activity, not at the form of investment, to determine the propriety of apportionability.” Mobil, 445 U.S., at 440. Changing the form of the income “works no change in the underlying economic realities of [whether] a unitary business [exists], and accordingly it ought not to affect the apportionability of income the parent receives.” Id., at 441. We therefore hold that Idaho‘s attempt to tax this income also violated the
V
For the reasons stated, the judgment of the Supreme Court of Idaho is
Reversed.
I join the Court‘s opinions in both No. 80-2015 and No. 80-1745 in reliance on the Court‘s express statement that the Court‘s holdings do not preclude future congressional action in this area. Ante, at 328, n. 23.
JUSTICE O‘CONNOR, with whom JUSTICE BLACKMUN and JUSTICE REHNQUIST join, dissenting.
The Court today declares that the
Today, the taxpayer wins. Yet in the end, today‘s decision may prove to be a loss for all concerned—interstate businesses themselves, which the Commerce Clause guarantees the opportunity to serve the country‘s needs unimpeded by a parochial hodgepodge of overlapping and conflicting tax levies; the Nation, which demands a prosperous interstate market; and the States, which deserve fair return for the advantages they afford interstate enterprise. For while this Court has the authority to invalidate a specific state tax, only Congress has both the ability to canvass the myriad facts and factors relevant to interstate taxation and the power to shape a nationwide system that would guarantee the States fair revenues and offer interstate businesses freedom from strangulation by multiple paperwork and tax burdens. Unfortunately, by apparently stripping Congress of the authority to do the job, the Court delays the day when a uniform system responsive to the needs of all can be fashioned.
*[This opinion applies also to No. 80-1745, F. W. Woolworth Co. v. Taxation and Revenue Department of New Mexico, post, p. 354.]
I
“Taxes,” as Justice Holmes once observed, “are what we pay for civilized society.” Compania General de Tabacos de Filipinas v. Collector of Internal Revenue, 275 U.S. 87, 100 (1927) (dissenting opinion). A natural corollary of this proposition is that the
In applying this fundamental principle to businesses that derive income from more than one State, we repeatedly have declared that a state tax passes constitutional muster unless the taxpayer can show that there is not even “a ‘minimal connection’ between [its] interstate activities and the taxing State,” or a merely “rational relationship between the income attributed to the State and the intrastate values of [its] enterprise.” Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425, 436-437 (1980) (quoting Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-273 (1978)). As the present case demonstrates, however, this oft-repeated formula is more easily stated than applied when a State attempts to tax the net income of an enterprise doing business in many jurisdictions.
The principal difficulty arises because a multijurisdictional business is “an organic system,” Wallace v. Hines, 253 U.S. 66, 69 (1920) (Holmes, J.), whose income cannot sensibly be reduced to the sum of the hypothetical incomes of distinct component parts, each wrenched from the unitary whole and conceptually confined to operations within a single State.1 With this understanding in mind, for more than half a century we have held that a State is not constitutionally required to tax only that slice of an interstate enterprise operating physically within the State. See, e. g., Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm‘n, 266 U.S. 271 (1924); Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207 (1980). Instead, as we stated only two Terms ago, “[i]t has long been settled that ‘the entire net income of a corporation, generated by interstate as well as intrastate activities, may be fairly apportioned among the States for tax purposes by formulas utilizing in-state aspects of interstate affairs,‘” id., at 219 (quoting Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 460 (1959)), provided only that in each case the resulting tax liability is not “‘out of all appropriate proportion to the business transacted‘” in the taxing
In short, the “linchpin” of apportioned state taxation is the concept of an organic, unitary business. Mobil Oil Corp. v. Commissioner of Taxes of Vermont, supra, at 439. The constitutionality of a state tax levied on extraterritorial business operations thus turns on whether the out-of-state business activity can be characterized as a separate business with no in-state contacts or whether instead it is a part of a unitary enterprise doing business in the State. In the case before us, the Court first errs when it attempts to determine whether or not ASARCO‘s investments were part of ASARCO‘s unitary nonferrous metals business.
II
ASARCO realized capital gains, dividends, and interest income from its ownership of securities issued by five foreign subsidiaries. The issue for the Court is whether that income was earned by ASARCO‘s unitary nonferrous metals business, and therefore was subject to Idaho‘s taxes, or instead was earned by a separate investment business unrelated to ASARCO‘s operations in Idaho, and therefore was constitutionally exempt from taxation by that State. As always, of course, the State‘s taxation of the company‘s income is presumptively constitutional. To overcome that presumption, ASARCO has the “‘distinct burden of showing by “clear and cogent evidence“‘” that Idaho‘s scheme “‘results in extraterritorial values being taxed.‘” Exxon Corp. v. Wisconsin Dept. of Revenue, supra, at 221 (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)).
According to the Court, ASARCO has met this burden by showing that during the relevant tax years its holdings in the five subsidiaries were passive investments not functionally
Both common sense and business reality dictate a different result. ASARCO, far from showing that its investment holdings were part of an “unrelated,”2 “discrete business enterprise,”3 “hav[ing] nothing to do with the activities”4 of its unitary nonferrous metals business, has failed in at least three ways to bear its “distinct burden” of demonstrating that Idaho‘s tax was unconstitutionally levied.
A
First, even accepting, arguendo, the Court‘s conclusion that the contested income was derived from passive investments, ASARCO has failed to show that its investment decisionmaking was segregated from its nonferrous metals business. ASARCO cannot deny that the subsidiary companies in which it invested were participants in the nonferrous metals industry, the very industry in which ASARCO played a major operational role. As the Court acknowledges, ASARCO “mine[d], smelt[ed], and refine[d] . . . nonferrous metals such as copper, gold, silver, lead, and zinc,” ante, at 309, while one of its subsidiaries “engaged in the mining, milling, smelting, and refining of nonferrous metals,” ante, at 309, n. 2, another engaged “in the same general line of business” as did “ASARCO in the United States,” ibid., a third “mine[d] and smelt[ed] copper,” ante, at 309-310, n. 2, and the last two were important “ASARCO customers,” ante, at 323, fabricating, respectively, cables and copper wares, ante, at 309, n. 2. In short, ASARCO invested not in “unrelated business[es],” such as hotel chains and breweries, but in
ASARCO invested in these nonferrous metals companies with a well-founded confidence that few other investors could muster, since much of what it had learned in operating its own nonferrous metals business must have been invaluable in evaluating the prospects for other companies engaged in similar businesses and markets worldwide. Put another way, it would have been a perverse act of self-denial for ASARCO to ignore its intimate knowledge of world markets, refining and smelting technology, mining operations, and geological reserves when it decided whether and how to invest in the five companies of concern here. Thus, the investment decisions ASARCO made regarding the securities of these five participants in the nonferrous metals markets undoubtedly depended heavily on ASARCO‘s knowledge of its own business.
In fact, during the course of this litigation, ASARCO has admitted as much. In the trial court, ASARCO‘s vice president and comptroller answered questions put to him by ASARCO‘s counsel as follows:
“Q. Now, ASARCO has investments in a lot of mining companies, does it not?
“A. Yes.
“Q. Can you tell the court why ASARCO makes investments of this nature?
“A. The ASARCO management utilizes its expertizes [sic] in channeling funds into these areas where they are knowledgeable and most knowledgeable—and hopefully accrue [sic] to the benefit of ASARCO stockholders.
“Q. So that essentially ASARCO feels that it can use its expertizes [sic] to produce the maximum returns for its shareholders?
“A. That is correct.
“Q. And whereas with other purchases I suppose ASARCO feels that the shareholders can make the investments themselves as well as ASARCO can? “A. Right.” Record 81-82.
Moreover, in its brief to the Supreme Court of Idaho ASARCO flatly stated that “[i]t invests its shareholders’ money in businesses in which it has expertise and distributes the investment return in the form of dividends to its shareholders.” Id., at 521.
In sum, far from showing by “clear and cogent evidence” that its investment decisions regarding other nonferrous metal suppliers and users were segregated from the resources of information and expertise developed in its own nonferrous metals business, ASARCO itself provided evidence that its investment decisionmaking was part of an indivisible, unitary nonferrous metals business. This alone warrants affirming the Idaho Supreme Court‘s due process ruling.
B
Second, again assuming, arguendo, that the contested investments were in fact passive, ASARCO has failed to show that its holdings were divorced from its management of the financial requirements of its nonferrous metals business. For all we know, ASARCO‘s investments were triggered by its need to obtain a return on idle financial resources accumulated for the future operation of its own primary business.
ASARCO does not, and could not, contend that all its investment income is per se beyond the taxing power of the nondomiciliary States in which it operates. Rather, it concedes that the
The interim investment of retained earnings prior to their commitment to a major corporate project, however, 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. Just as companies prefer to maintain a cushion of working capital rather than resort to the short-term capital markets on an hourly basis for the money necessary to operate their businesses, many enterprises prefer to acquire the capital necessary for the expansion and replacement of plants and equipment by creating long-term funds, rather than resort to the vagaries of the capital markets. In order to prevent the accumulating capital from sitting idle, such funds are usually invested in financial assets with a degree of liquidity appropriate to the money‘s intended ultimate use.6 Any return ASARCO earned on such investments
Such investment of idle funds, after all, mirrors the borrowing of funds a company lacks. Undoubtedly, ASARCO would be quick to assert that any long-term borrowing recorded on the liability side of its balance sheet is an integral part of its unitary business justifying the deduction of interest expense in the computation of apportionable net income. If so, ASARCO cannot contend that the long-term investments recorded on the asset side of its balance sheet are automatically separate from its unitary business, thereby justifying the exclusion of the revenues received from apportionable net income. The same principles apply whether the money is going in or coming out.
Thus, because investments of ASARCO‘s working capital are functionally integrated with its unitary nonferrous metals business, and because ASARCO failed to show by “clear and cogent evidence” the facts necessary to distinguish, on a principled basis, its investments in the securities of the five subsidiaries at issue here,7 the Idaho Supreme Court correctly concluded that apportioned taxation of ASARCO‘s contested investment income does not violate the
Finally, the Court errs even in its fundamental determination that ASARCO‘s holdings were passive investments unrelated to ASARCO‘s operational business. In fact, the disputed investments actively contributed to ASARCO‘s nonferrous metals business.
To begin with, ASARCO had effective operational control of at least three of the five subsidiaries. ASARCO‘s commanding 52.7% interest in M. I. M. Holdings, Ltd., uncontestably gave it full control of that company. Although ASARCO did not wield quite the same power over Southern Peru Copper, its 51.5% interest nonetheless gave it unilateral veto power over all corporate decisions, including those supported unanimously by all other shareholders.8 Finally, in the case of ASARCO Mexicana, the record discloses only that ASARCO had been forced to sell 51% of its initial 100% interest to Mexican nationals, retaining a 49% interest for itself. ASARCO has made no showing that it is not the principal investor in Mexicana and thus able to control the company. In sum, ASARCO undoubtedly was the dominant factor in at least three of the five subsidiaries under consideration here, with the power to use them to advantage in its nonferrous metals business.9 The Court, however, minimizes the sig-
The Court‘s result is hard to understand in view of our decision just two years ago in Exxon Corp. v. Wisconsin Dept. of Revenue. In summarizing our result in Exxon, we asserted that the “important link” establishing the unity of
First, we noted that “‘placing individual segments under one corporate entity . . . provide[s] greater profits stability‘” because “‘nonparallel and nonmutual economic factors which may affect one department may be offset by the factors existing in another department.‘” Id., at 225 (quoting the testimony of an Exxon senior vice president). ASARCO‘s ownership of subsidiaries doing business in precisely ASARCO‘s line of work in two different geographical markets, M. I. M. Holdings in Australia and ASARCO Mexicana in Mexico, undoubtedly provided exactly that sort of advantage; economic conditions in Australia and Mexico do not track those in the United States, so that when the nonferrous metals business is in the doldrums in one country, it may be prospering in another. But, unlike the Exxon Court, today‘s Court is blind to the significance to the “profits stability” of ASARCO‘s nonferrous metals business of its subsidiaries in unrelated geographical markets.
Second, in Exxon we noted that the vertical relationship between the various departments in Exxon‘s business provided both “an assured supply of raw materials” and an “assured and stable outlet for products” so that Exxon could “minimiz[e]” the “risk of disruptions” “due to [the] supply and demand imbalances that may occur from time to time.” Ibid. The Exxon Court‘s recognition of the business importance of captive suppliers and customers merely confirmed our earlier decision in Mobil Oil, in which we affirmed Vermont‘s apportioned taxation of the more than $115 million in dividend income Mobil had received from its 10% interest in the Arabian American Oil Co. 445 U.S., at 457, n. 10 (STEVENS, J., dissenting). Mobil‘s 10% investment, apart from providing handsome dividends, apparently had helped to assure Mobil of supplies of crude oil for its petroleum business. By contrast, the Court today inexplicably invalidates Idaho‘s taxation of ASARCO‘s dividend income from its fivefold
Apparently, the Court no longer believes it significant that the subsidiaries in which a parent has major holdings “minimiz[e]” the “risk of disruptions” “due to [the] supply and demand imbalances that may occur from time to time,” Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S., at 225, by providing “assured suppl[ies]” and “stable outlet[s],” ibid., unless the subsidiaries are actively managed on a day-to-day basis. The Court evidently would find that ASARCO‘s subsidiaries were part of ASARCO‘s unitary business only if ASARCO experienced a “supply and demand imbalanc[e]” sufficiently severe to force it to exercise day-to-day control of its captive subsidiaries. In this regard, the Court‘s position is akin to the view that a paid-up fire insurance policy is a worthless asset unless smoke is in the air.
In sum, despite ASARCO‘s failure on each of the three counts just discussed to bear its “distinct burden” of showing that its investments are unrelated to its nonferrous metals business, the Court rules that Idaho cannot tax the investment income at issue here. In so doing, the Court unwisely substitutes for the multifaceted analysis used to determine whether the businesses in Mobil Oil and Exxon were unitary the oversimplified test of active operational control. The result is that the Court has ignored business advantages to ASARCO more than sufficient to establish that its holdings in its subsidiaries were part of its unitary business. In consequence, the Court wrongly concludes that ASARCO has borne the “distinct burden” of showing that its holdings in the
Trying to justify that result, the Court suggests that for it to hold otherwise “would destroy the concept” of a unitary business by expanding the idea until it “becomes no limitation at all” on the power of the States to tax. Ante, at 326. In actuality, the Court‘s decision today shrinks the concept beyond all recognition. Thus it is the Court‘s holding, not Idaho‘s tax, that menaces the unitary-business principle. The “linchpin” is loose from the axle.
III
As a natural consequence of its decision that Idaho cannot tax ASARCO‘s investment income, the Court simultaneously, if implicitly, rules out taxation of the disputed income by any other nondomiciliary State in which ASARCO conducts its nonferrous metals business, absent a special connection between the would-be taxing State and ASARCO‘s investments.12 By the process of elimination, then, the Court‘s holding provides a partial answer to the question of
A
First, there is the disturbing possibility that no State could satisfy the requirements of the
B
Second, there is the possibility that only a domiciliary State or States could tax the disputed income. In Mobil Oil, the Court stated that “[t]axation by apportionment and taxation by allocation to a single situs are theoretically incommensurate, and if the latter method is constitutionally preferred, a tax based on the former cannot be sustained.”
Perhaps such a preference could find some blessing in tradition, but certainly not in logic or in the recent opinions of this Court. In Mobil Oil itself, the Court declared:
“We find no adequate justification . . . for such a preference. Although a fictionalized situs for intangible property sometimes has been invoked to avoid multiple taxation of ownership, there is nothing talismanic about the concepts of ‘business situs’ or ‘commercial domicile’ that automatically renders those concepts applicable when taxation of income from intangibles is at issue. The Court has observed that the maxim mobilia sequuntur personam, upon which these fictions of situs are based, ‘states a rule without disclosing the reasons for it.’ The Court also has recognized that ‘the reason for a single place of taxation no longer obtains’ when the taxpayer‘s activities with respect to the intangible property involve relations with more than one jurisdiction. . . . Moreover, cases upholding allocation to a single situs for property tax purposes have distinguished income tax situations where the apportionment principle prevails.” Id., at 445 (citations omitted).
The Court thus made clear only two years ago that a State of domicile cannot expect automatically to meet the due process requirements for the taxation of investment income. As with a nondomiciliary State, a domiciliary State may tax investment income only if it confers benefits on or affords protection to the investment activity. Mere assertion of the ar-
The principal functional basis on which this Court has justified taxation by the commercial domicile, moreover, actually supports the fully apportioned taxation of investment income that today‘s decision rules out, rather than taxation by allocation to a single situs. In Wheeling Steel Corp. v. Fox, 298 U.S. 193 (1936), for example, we sustained an ad valorem tax on accounts receivable and bank deposits levied by the State in which the taxpayer maintained “the actual seat of its corporate government,” id., at 212, for the reason that the intangibles at issue had become “‘integral parts of some local business,‘” id., at 210 (quoting Farmers Loan & Trust Co. v. Minnesota, 280 U.S. 204, 213 (1930)). Thus, other than the arbitrary fiction that intangible property is “located” at the domicile of its owner, the underlying jurisdictional basis for taxation at the commercial domicile is grounded in the fact that intangibles are an “integral part” of the business. This justification supports the principle of apportionment rather than allocation solely to the single domiciliary State. After all, if intangibles are an “integral part” of the unitary business in the domiciliary State, they also are related to the business of the corporation elsewhere. It hardly makes sense to allocate income to the commercial domicile on the theory that business activity at the commercial domicile promotes the unitary business everywhere, and then to ignore those connections and to disregard the claims of the other States in which the unitary business operates. See Dexter, Taxation of Income from Intangibles of Multistate-Multinational Corporations, 29 Vand. L. Rev. 401, 416 (1976).
In short, unless the Court is prepared to abandon the unitary-business principle as applied to investment income and to read into the Constitution the arbitrary legal fiction that intangibles are situated at the domicile of their owner, the
C
We thus arrive at the only remaining possibility. The Court‘s holding today, taken with past decisions, may imply that ASARCO‘s investments must be treated as though ASARCO were not only running its nonferrous metals business but also running as another, separate business a sort of mutual fund or holding company specializing in the worldwide nonferrous metals industry. The income from this fictitious separate business would then be taxable on an apportioned basis by those States in which the business was carried out, just as ASARCO‘s unitary nonferrous metals business could be taxed on an apportioned basis by those States in which that business is conducted.
If so, the Constitution apparently requires that a very small tail be permitted to wag a very big dog. For in the case of companies like ASARCO with tens or hundreds of millions of dollars of dividend income generated by a handful of long-term investments, vast differences in state revenues may turn on whether the quarterly dividend checks sent from “passive” subsidiaries are sent to a clerk in a company office in one State rather than another. Surely it is highly anomalous that the
Moreover, if such a requirement were judicially imposed it would create potentially staggering practical difficulties for taxpayers, state tax administrators, and, ultimately, the courts. For despite the Court‘s easy conclusion today that ASARCO‘s supposedly discrete investment business is dis-
In sum, the Court has erred. Without a well-founded constitutional mandate, it has straitjacketed the States’ ability to develop fair systems of apportionment, prematurely ending the evolutionary process begun by the Uniform Division of Income for Tax Purposes Act and the Multistate Tax Commission. By limiting the apportionment concept by restrictions not found anywhere in the Constitution, moreover, the Court has committed itself to a path leading to more constitutional problems and greater involvement by this Court in the intricacies of interstate taxation.
IV
The Court‘s error, moreover, is compounded by its decision to invoke the
This constitutional shortsightedness overlooks the fact that Congress, not this Court, holds the ultimate responsibility for maintaining a healthy system of interstate commerce. Moreover, it is Congress, not this Court, which has the institutional tools to deal with these complex problems. Con-
“[T]he courts have over the years attempted to resolve the numerous and complex problems [of state taxation of interstate commerce] brought before them. . . . [T]heir decisions on State taxation leave much to be desired both in individual cases and as a body of law. The reason for this inadequacy is completely unrelated to the ability or diligence of a particular court or of any particular judge. The inadequacy is entirely institutional.
“The problem arises from the fact that a court deals in absolutes, and in this area an absolute decision in either direction is not likely to be satisfactory. . . . [T]he court is substantially handicapped by its inability to explore fully the nature, the extent, and the impact of the burdens created [by state taxes].
“The inherent inadequacy of the judicial process to achieve a full accommodation of the competing demands of the States for taxes and of the national interest in unhindered commerce, is perhaps nowhere more clear than in the apportionment of income for tax purposes. . . . In the typical case of this kind, the tax of only one of the States would be before the court. . . . The court has only the records of the cases before it with only such information as may be necessary to state the facts and consequences in those cases. On this basis, is the court in a position to choose between [competing approaches], striking down all formulas containing one or the other? If so, what standard should it use in deciding which one? Given the adversary system of litigation, how does the court obtain the necessary data on economic burdens and revenue consequences? . . .
“Difficulties also arise from the limitations of the judicial process in prescribing what constitutes adequate jurisdiction to tax. As a question of due process the court can do no more than decide on conceptual grounds . . . whether the quality of the relationship in the case before it is sufficient to sustain the imposition of the tax. . . . “. . . It is no better suited to devise and prescribe general rules setting the optimum level of jurisdiction than it is to impose a uniform apportionment formula. For example, the judicial process does not lend itself to a determination of what level of nexus would strike the most equitable balance between the demands of the States for revenue and the probable burdens of compliance.” H. R. Rep. No. 1480, 88th Cong., 2d Sess., 11-12 (1964).
Nor is Congress alone in recognizing the limitations of the judiciary in this field. Many Justices of this Court have acknowledged “the weakness of the judicial process in these tax questions where the total problem . . . reaches us only in installments.” Northwest Airlines, Inc. v. Minnesota, 322 U.S. 292, 307 (1944) (Jackson, J., concurring). The Court itself has said: “To introduce a new doctrine of tax apportionment . . . is not merely to indulge in constitutional innovation. It is to introduce practical dislocation into the established taxing systems of the States. . . . [C]ertainly we ought not to embarrass the future by judicial answers which at best can deal only in a truncated way with problems sufficiently difficult even for legislative statesmanship.” Id., at 299-300 (opinion of the Court). Surely in a case such as the one before us, Congress, unconfined by “the narrow scope of judicial proceedings,” Pennsylvania v. Wheeling & Belmont Bridge Co., 13 How. 518, 592 (1852) (Taney, C. J., dissenting), is in a better position “in the exercise of its plenary constitutional control over interstate commerce, not only [to] consider whether such a tax as now under scrutiny is consistent with the best interests of our national economy, but
V
In sum, the Court has focused its attention solely on the question whether ASARCO‘s interests in its subsidiaries represented active investments and concludes they did not. The Court then permits this initial erroneous result to derail its analysis. Instead of continuing, the Court fails to consider the possibility that ASARCO‘s investment decisionmaking was not segregated from its operational nonferrous metals business; fails to consider the possibility that ASARCO‘s investments were simply an interim use of long-term funds accumulated for ultimate use elsewhere in the business; fails to consider the possibility that ruling out apportioned taxation of income earned from intangibles may imply that such income is “nowhere income“; fails to consider the possibility that its ruling may be inconsistent with the unitary-business principle because it suggests that income from intangibles may be taxed only by a domiciliary State; and fails to consider the possibility that it may be as difficult to apportion a business as to apportion income for constitutional purposes. Finally, and most distressingly, the Court fails to consider its own limitations and Congress’ constitutional prerogatives. Had the Court given the intricate questions presented by this case the attention they deserve, it might have reached a different result. I respectfully dissent.
Notes
Prior to the tax years in question, however, the Justice Department brought an antitrust suit against ASARCO related to its holdings in General Cable and Revere Copper. The suit culminated in a consent decree issued in 1967 forbidding ASARCO to sell to General Cable and Revere Copper at prices lower than ASARCO sold to other customers and preventing ASARCO from voting its stock in either company. In 1970, the last of the three tax years at issue here, the decree was modified and “ASARCO was compelled . . . to divest itself of all its General Cable stock.” Ante, at 324, n. 20.
ASARCO argues that the 1967 consent decree, which was issued before the tax years of concern here, prevented General Cable and Revere Copper from being a part of ASARCO‘s unitary business. To the contrary, however, the antitrust suit and consent decree strongly suggest that General Cable and Revere Copper were entangled in ASARCO‘s unitary business, perhaps unlawfully so. On the present record, ASARCO has not borne the burden of showing that the 1967 decree severed enough of the connections between ASARCO and the two subsidiaries to transform ASARCO‘s holdings from active components of its unitary business to passive investments. At least with respect to General Cable, the modification in 1970 (the last tax year in issue here) of the consent decree so that ASARCO was required to sell its holdings in the company indicates the contrary, since divestiture would scarcely be necessary if the business of the two companies had been unrelated. Moreover, the mere fact that ASARCO traded with General Cable and Revere Copper at market rates does not compel the conclusion that ASARCO‘s investments in those companies were part of its unitary business. In Exxon, for example, we concluded that the fact that “wholesale market values” were assigned “to interdepartmental transfers of products and supplies,” 447 U.S., at 225, did not undermine the unitary nature of Exxon‘s business.
Although I believe that ASARCO‘s showing was insufficient to establish that General Cable and Revere Copper were not under its control for purposes of determining the constitutional limits of Idaho‘s taxation, for simplicity in what follows I assume only that ASARCO was a major investor in these two subsidiaries.
In the present case, the Court could have reached its result by relying on the Commerce Clause. Our cases establish that analysis of the validity of state taxation under the Commerce Clause is similar to analysis under the
In Mobil, in applying the unitary-business principle, the Court stated that the question is whether “the [investment] income was earned in the course of activities unrelated to the sale of petroleum products” in the State seeking to tax the income. Our decision went against Mobil Oil Corp. because we found that its “foreign activities [were] part of appellant‘s integrated petroleum enterprise,” and because the subsidiaries in question were not shown to operate as “discrete business enterprise[s].” 445 U.S., at 439. In this case, in sharp contrast, the record establishes that each of the three partial subsidiaries in question operated a “discrete business enterprise” having “nothing to do with the activities of [ASARCO] in the taxing State.” Id., at 442.
As we recognize in this opinion, these cases are decided on their facts in light of established general principles. The most comprehensive discussion of the factors that are relevant is contained in our recent decisions in Mobil and Exxon. In both of those cases, that we follow today, the States prevailed because it was clear that the corporations operated unitary businesses with a continuous flow and interchange of common products. ASARCO has proved that these essential factors are wholly absent in this case. It is late in the day to confuse this important area of state tax law by rewriting the standards of Mobil and Exxon.