Document: 466 U.S. 388 104 S.Ct. 1856 80 L.Ed.2d WESTINGHOUSE ELECTRIC CORPORATIONv.James H. TULLY, Jr., et al. No. 81-2394. Supreme Court of the United States Argued Nov. 1, 1983. Decided April 24, 1984. Syllabus The Internal Revenue Code 1954 (IRC) was amended in 1971 to provide tax incentives for firms increase their exports, and that purpose special treatment provided a "Domestic International Sales Corporation" ("DISC"), corporation substantially all whose assets gross receipts are export-related. Under IRC, DISC is not taxed on its income, but instead portion (50% years question this case) income—"deemed distributions"—is attributed shareholders whether or actually paid distributed them. Taxes remaining income—"accumulated income"—are deferred until income no longer qualifies treatment. In response these amendments, New York Legislature enacted franchise statute requiring consolidation receipts, assets, expenses, liabilities subsidiary with those parent corporation. assessed against basis consolidated amounts. also provides an offsetting credit, result which lower effective rate accumulated included return 30% otherwise applicable rate. credit limited from export products "shipped regular place business taxpayer within [New York]." computed by (1) dividing DISC's property shipped total sale property; (2) multiplying quotient (the ratio) parent's allocation percentage; (3) product parent; (4) 70%; (5) attributable share income. Appellant Westinghouse Electric Corporation, manufacturer electrical qualified do York, has wholly owned subsidiary, Export Corporation (Westinghouse Export), as federally tax-exempt DISC. On 1972 1973 returns, appellant amount deemed equal about half Export's did include State Tax Commission sought computing appellant's taxable first combining appellant, then giving benefit 5% each year could be shipments. denied relief petition redetermination resulting deficiencies. Ultimately, after had mixed success Appellate Division federal constitutional challenges taxing scheme, Appeals reinstated Commission's determination. Rejecting claim impermissibly subjected sales non-New higher than comparable court held simply forgives right levy, such being determined reference shipments method satisfied due process, any effect interstate commerce too indirect violate Commerce Clause. Held: manner allows corporations DISCs discriminates shipping other States, violation Pp. 398-407. (a) It second adjustment reflect ratio, made only base figure, treating differently similarly situated respects except percentage DISCs' activities conducted York. This greater moves into Conversely, decreases allowed given increases States. Thus, scheme incentive increased activity penalizes 399-401. (b) A cannot circumvent prohibition Clause placing burdensome taxes out-of-state transactions burdening levied aggregate—as tax—rather individual transactions. Nor may encourage development local industry means measures invite multiplication preferential trade areas contravention Whether diverts new merely prevents current diverted elsewhere, it still discriminatory "forecloses tax-neutral decisions . creates advantage" operating "a burden sister States." Boston Stock Exchange v. Comm'n, 429 318, 331, 97 599, 608, 50 514. 402-407. 55 N.Y.2d 364, 449 N.Y.S.2d 677, 434 N.E.2d 1044, reversed. Paul M. Dodyk, City, appellant. Peter Schiff, Albany, N.Y., appellees. Justice BLACKMUN delivered opinion Court. 1 case, we confronted constitutionality afforded certain Domestic Corporations. 2 * issue part Legislature's additions changes effectuated Act 1971, Pub.L. 92-178, §§ 501-507, 85 Stat. 535. effort "provide exports," H.R.Rep. 92-533, p. 9 (1971); S.Rep. 92-437, 12 (1971), U.S.Code Cong. & Admin.News 1825, Congress gave recognition corporate entity described "DISC." 991-997 Code, 26 U.S.C. 991-997. if 992(a), 993.1 law, § 991. Instead, income—labeled "deemed shareholders2 basis, 995. statutory provisions during calendar case), 50% shareholders. 544.3 DISC—labeled "accumulated either 996 996. 3 Enactment legislation caused revenue officials some concern. does generally impose distributions received subsidiary; instead, directly extent State. See N.Y. Law 208.9(a)(1) (McKinney 1966). Given State's structure, followed lead DISCs, would have been Budget, Report A. 12108-A S.10544, pp. 5-6 (May 23, 1972), reprinted Bill Jacket N.Y.Laws, ch. 778, 13, 17-18 (Budget Report). budget analyst reported legislature provision were might suffer losses much $20-$30 million annually. Id., at 20. hand, warned state taxation discourage formation manufacture goods 18.4 4 With conflicting considerations mind, pertaining DISCs. chs. 778 779 (McKinney), codified 208 219-a Supp.1983-1984). require parent. 208.9(i)(B). attempt positive State," however, "partially credit." Budget Report, 18. reflected significantly, 210.13(a)(2). derived percentage;5 year. 210.13(a)(2) (5). II 5 basic facts stipulated. (Westinghouse) Pennsylvania engaged equipment, parts, appliances. regularly pays Among Westinghouse's subsidiaries Delaware Westinghouse, acts commission agent behalf both affiliates manufactured services related products. All consisted commissions sales. on, 1972, $26 million, approximately $13 Export.6 1973, $58 million; almost $30 income.7 returns. 6 appellees, (Tax Commission), income; is, pursuant 208.9(i)(B) shipments.8 After applying relevant percentages, asserted deficiencies $73,970 (later corrected $71,970) plus interest $151,437 1973. App. 42, 46. 7 filed proposed By petition, later perfected, contended compute liability Export, jurisdictional nexus State, Due Process Clauses Constitution. further limiting violated Commerce, Process, Equal Protection Clauses. declined entertain contentions, ground that, administrative agency, lacked jurisdiction pass upon "the laws York." 47. 8 brought suit review determination, again raising claims. case transferred Division. That court, 3-to-2 vote, found law requires added return, 208.9(i)(B), unconstitutional foreign commerce. 82 App.Div.2d 988, 440 397 (1981). based holding fact intended exempt taxation. 989, N.Y.S.2d, 399-400. decision unnecessary consider York's geographical limitation because applies Division, went reject Ibid., 400. took appeal Division's judgment invalidating cross-appealed upholding distributions. arguments raised below. unanimous opinion, determination Commission. 1044 (1982). Congress' level pre-empt 372-373, 680-81, N.E.2d, 1047-1048. rejected argument necessary satisfy minimal process standards must predicated. Finally, 210.13(a) noted devised state-tax akin Congress. difference while chosen form deferral, elected use credit. 374-376, 681-83, 1049-1050. 10 acknowledged ensure lose competitive position vis-a-vis since expected offer benefits traced steps required calculating concluded: "Obviously, plays integral role 375, 682, 1050. Use percentage, reasoned, ensures levy. 376, 683, forgiven satisfies run afoul Ibid. 11 We probable respect 459 1144, 103 784, 74 991 (1983), now reverse respect. III seeks convince us purposes. unitary principles, outside will full Only net (which includes income) subject averaging percentages in-state property, payroll, receipts. 210.3 long upheld, restraints, formula-apportionment determine business' jurisdiction. Container Corp. Franchise Board, 463 159, 169-171, 2933, 2942-2943, 77 545 (1983); see Illinois Central R. Co. Minnesota, 309 157, 60 419, 84 L.Ed. 670 (1940); Hans Rees' Sons, Inc. North Carolina ex rel. Maxwell, 283 123, 51 385, 75 879 (1931); Bass, Ratcliff Gretton, Ltd. 266 271, 45 82, 69 282 (1924); Underwood Typewriter Chamberlain, 254 113, 41 45, 65 165 (1920). 13 employs constitutionally acceptable formula, our view, serves obscure case. acceptability formula employed before us. attempting fairly apportioned insulate challenge allowing apportionment procedure determines what Nothing apportionprocess releases restraints limit way exercises power over 14 Here, argues exercise offends Fourteenth Amendment. foreclosed acceptable. (1983) (dismissing want substantial allocating parent). "Fairly apportioned" "nondiscriminatory" synonymous terms. violates turn. 15 allowable ratio ignores ratio. factor percentage. 210.13(a). alleviates fears overly generous once accomplished, apply From standpoint fair additional inaccurate duplicative. 16 adjustment, States.9 18, 17 determining Clause, foundation analysis principle " '[t]he very create area free among several States.' 328, 606, 514 (1977), quoting McLeod J.E. Dilworth Co., 322 327, 330, 64 1023, 1026, 88 1304 (1944); accord, Great Atlantic Pacific Tea Cottrell, 424 366, 96 923, 47 (1976). undisputed corollary 'the authorization enact protection encouragement own force created interference [T]he even without implementing States,' including States' tax. Exchange, U.S., S.Ct., Freeman Hewit, 329 249, 252, 67 274, 276, 91 265 (1946). For reason, "[n]o consistent 'impose providing direct commercial advantage business.' 329, 607, Northwestern Portland Cement 358 450, 458, 79 357, 362, 421 (1959). Halliburton Oil Well Cementing Reily, 373 64, 83 1201, 202 (1963); Nippert Richmond, 327 416, 66 586, 90 760 (1946); I.M. Darnell Son Memphis, 28 247, 52 413 (1908); Guy Baltimore, 100 434, 25 743 (1880); Welton Missouri, 275, 23 347 (1876). 18 delicate balancing national open exercising powers case-by-case left 'much room controversy confusion little precise guides indispensable taxation.' 457, 362. light think there "controversy confusion" present litigation. lessons explicated Maryland Louisiana, 451 725, 101 2114, 68 576 (1981), controlling. 19 Louisiana struck down statutes encouraged imposed burdens economic taking placed similar Louisiana's "First-Use" tax—which natural gas users series exemptions credits—violated "unquestionably discriminate[d] favor interests." 756, 2134. Similarly, stock-transfer reduced payable nonresidents when involved (rather out-of-state) applied maximum (but sale. 332, 608. declared "no discriminatorily operations performed State." 337, 610. schemes transactional rather general distinction, irrelevant analysis. aggregated can 20 carried disallowing imposing two identical. 70% indistinguishable one States.10 attach significance formal distinctions lack substance. See, e.g., 2134 (tax uniform discrimination various credits exclusions" benefited consumers gas). 21 contends subsidy American generally, such, congressional intent establishing find merit argument. While Federal Government seek domestic employment improve balance-of-payments offering advantages who produce abroad, "invite areas" Dean Milk Madison, 340 349, 356, 71 295, 299, 95 (1951). note, also, truly promote exports general, reason 22 discriminatory, places significance. points relatively high actual viewed terms whole slight. divert but, rather, prevent loss already time enacted. 608.11 using induce 'business home more efficiently elsewhere,' id., 336, 610, Pike Bruce Church, Inc., 137, 145, 844, 849, 174 (1970), artificial rigidity pattern industry,' 146, Toomer Witsell, 334 404, 1156, 1166, 92 1460 (1948).12 When tax, face, designed effects, "need know how unequal concluding unconstitutionally discriminates." 760, 2136.13 contrary therefore 24 so ordered. Specifically, 992(a)(1) "is incorporated under following conditions year: "(A) percent (as defined section 993(f)) consist 993(a)), "(B) adjusted 993(b)) close equals exceeds sum year, "(C) class stock par stated value outstanding least $2,500 day "(D) election subsection treated year." 993(a)(1), are— sale, exchange, disposition lease rental used lessee lease, rental, corporation, (other property), "(E) dividends (or amounts includible 951) (e)), "(F) obligation asset, "(G) engineering architectural construction projects located location) "(H) performance managerial furtherance production DISC." majority shareholder, most single Service, Statistics Income Bulletin, 2, (1983). Subsequent question, governing changed decrease Reform 1976, 94-455, 1101(a), 1655, excess 67% average 4-year period. $100,000 less provision. 995(e)(3) (f) (f). Equity Fiscal Responsibility 1982, 97-248, 204(a), 423, 57.5%, beginning 1983, 291(a)(4) 291(a)(4). considered possible methods first, obtain engender costs. uses Since purposes devised. method, feared corporation's according set forth basically, situated, earned, payroll More precisely, $25,987,000. distribution $12,956,500. 43. $57,948,738. $29,838,006. willing allow $2,569.77 4.771297% ports, $6,098.22 5.523182% Hypothetical examples demonstrate corporations, DISC, face different assessments depending location exports. $10,000, $500, 40%, assuming 10%, Table shows situations where ships 100%, 50%, 0% locations York: TABLE % Shipment 100% Parent's $10,000 Accumulated ____500 Consolidated 10,500 Business Allocation 40% Taxable 4,200 Rate 10% Liability (Pre-Credit) 420 Credit Allowed _______14 ________7 ________0 Final Assessment 406 revenues (100%, 0%) (40%); (10%); (70%); and, finally, ($500). unmindful results induced move upward offset absolute terms, increases. rate, next example, assumed $4,000 activity. Each $500 differs others ports. Assuming same generate dollar proportionately increases: B 42.86% 40.48% 38.10% 4,500 4,250 4,000 450 425 400 _______15 435 418 Effective 9.67% 9.84% third example demonstrates pernicious scheme. maintain parent-DISC organizations, differ they addition, account $3,000 three organizations conducts As decreases. lowers awards activity: C 75% 60% Shipments Other ______0 _1,000 _2,000 Total 3,000 5,000 10,000 13,000 14,000 15,000 53.85% 46.67% 7,000 700 ______113 _______98 587 595 602 These illustrate inherent credit: awarded 9% allowed, x 9%, 2.7%. rebut submits Nation's institution Brief Appellees 26-27. refute Although large enough halt exodus doubt slowed decline shipping. classify here commerce, maintenance airports, waterways, highways; police fire protection; enactment job-incentive investment-tax credits. 21-22. reiterate impermissible i.e., specific segment "hold compete commerce; competition lies heart policy. hold 336-337, insignificance size practical issue, reminds rejection bill fact, absence owe $8,500 n. 8, supra; Tr. Oral Arg. appears insignificant compared $1 1972-1973 ibid. affect analysis, note hardly de minimis perspective forwent ports $170,000.

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