Document: 458 U.S. 354 102 S.Ct. 3128 73 L.Ed.2d 819 F. W. WOOLWORTH CO., Appellantv.TAXATION AND REVENUE DEPARTMENT OF the STATE NEW MEXICO. No. 80-1745. Argued April 19, 1982. Decided June 29, Rehearing Denied Oct. 18, See 459 961, 103 274. Syllabus Appellant's principal place of business and commercial domicile are in New York, but it engages chainstore retailing throughout United States. Under its income tax laws, Mexico distinguishes between "business" income, which apportions other States, "nonbusiness" generally allocates to a single State on basis domicile. Appellant reported dividend from four foreign subsidiaries, engage countries, as none was be allocated Mexico. Similarly, appellant did not report sum, commonly known "gross-up," that never actually received subsidiaries Federal Government (for purposes calculating appellant's federal credit) deemed have received. On audit, appellee determined should included apportionable both dividends gross-up figure. protest denied, appellee's decision reversed by Court Appeals. However, Supreme turn reversed, holding figure were income. Held : 1. Mexico's portion fails meet established due process standards. Pp. 362-372. (a) The linchpin apportionability for state taxation an interstate enterprise is "unitary-business principle." Appellant—as owner all stock three majority interest fourth—potentially has authority operate these companies integrated divisions unitary business. But potential company part dispositive when, here, fact derived unrelated activity each operates discrete enterprise. ASARCO Inc. v. Idaho Tax Comm'n, 307 458, 3103, 787; Mobil Oil Corp. Commissioner Taxes Vermont, 445 425, 100 1223, 63 510. P. 362. (b) For purposes, attributed must rationally related values connected with taxing State. This limitation satisfied merely because nondomiciliary parent corporation derives some economic benefit ownership another corporation. 363-364. (c) None factors relevant State's right exists this case. record shows subsidiaries' operations such store site selection, advertising, accounting, purchasing, warehousing, personnel training—were functionally integrated. And except type occasional oversight—with respect capital structure, major debt, dividends—that any gives investment subsidiary, there little or no integration activities centralization management. Thus, "unitary business." Exxon Wisconsin Dept. Revenue, 447 207, 2109, 65 66, distinguished. 364-372. 2. efforts "gross-up" also contravenes Due Process Clause. "fictitious" treated credit same manner domestic In case arose nations had relationship Pp.372-373 95 N.M. 519, 624 P.2d 28, reversed. William L. Goldman, Washington, D. C., appellant. Sarah E. Bennett, Santa Fe, N. M., appellee. Justice POWELL delivered opinion Court. 1 question whether Clause permits Woolworth Co. do We decide may include within Woolworth's calculated order claim tax. 2 * York. It retail through chains stores located Puerto Rico, Virgin Islands. sells wide spectrum merchandise, including dry goods, hardware, small appliances, confections, packaged fountain items. fiscal year ending January 31, 1977, gross sales totalled approximately $2.5 billion, amounting $13 million—or about 0.5% App. 57a. 3 owns relevance suit. Three wholly owned: GmbH, Germany; Woolworth, Ltd., Canada; S. A. de C. V. Co., English 52.7%, remainder held traded publicly. These corporations retailing.1 Together they paid $39.9 million during question. 4 adopted version Uniform Division Income Purposes Act 1965, N.M.Stat.Ann. §§ 7-4-1—7-4-21 (1981), joined Multistate Compact 1967. 7-5-1 7-5-7 (1981). 307, 311-312, 3107, States Steel 434 452, 98 799, 54 682 (1978). Consequently income,2 purposes,3 income,4 domicile.5 German, Canadian, Mexican, $1.6 gain hedging transaction British pounds. undertaken purpose insuring payment subsidiary's against currency fluctuations. 52a-54a. $25.5 pursuant 26 U.S.C. 78, 901(a), 902(a)) subsidiaries.6 5 Taxation Revenue Department that, under law, exchange gain, additions increased apportioned $84,622 $401,518. 69a. denied protest,7 appeal Bureau 542, 51 (1979). 6 As matter Appeals excluded receipt at issue. court stated "[t]here indication long-standing investments [in subsidiaries] used either taxpayer's conducted . ." Id., 545, P.2d, 54. With issue, said "rigid insistence" inclusion amount "is refusal recognize obviously fictitious figure, made artificial reporting requirements specific purpose. 543-544, 52-53. " '[g]ross-up' represents [that] out taxes governments," id., 544, 53, parent. thus likewise sum income.8 7 over one dissent. 28 constituted observed "[r]egrettably, needs very poor job inquiring into developing facts case." 524, 33. nonetheless found substantial evidence support findings payments met statutory test constitutional identified "key question" after our 510 (1980), "whether those earned N.M., 528, 37. stated: 8 "The [dividend] [from mutual affiliates. control interdependence, history relationships, placing money [Woolworth's] general operating account, point functional reveal underlying here." 529, 38. 9 Respecting "deem[ed] unnecessary delve intricacies laws regulations," sufficient "to say since decided use option, governments 521-522, 30-31. "Admittedly, gross-up, claims 'business income' deliberately acceded to, does fit ordinary definition 'income' 522, 31. Nevertheless, noted lower finding "obtain procedure 523, 32. consequently rejected challenges income.9 II 10 argued tandem 787 involved gains subsidiaries. reiterated today '[t]he "linchpin apportionability" ' U.S., 319, S.Ct., 3110, quoting 223, 2120, 66 supra, 439, 1232. 11 payors 52.7% fourth. result, (at least owned companies) elects directors. potentially Our makes clear, however, looking "the 'underlying realities business,' "derive[d] 'unrelated activity' constitutes 'discrete enterprise.' Exxon, 223-224, Mobil, 441, 442, 1232, 1233, 1234. ASARCO, 322-323, 3112-3113 (holding 52.7%-owned subsidiary parent's business). 12 important analyzed different legal standard. After stating existence question," proceeded resolve largely emphasizing potentials subsidiaries: 13 possession large assets advantage great value parent; 'it give will result more economical methods; standing shall facilitate purchases; enable enlarge field many ways prestige.' Flint Stone Tracy 220 107, 166 [31 342, 355, 55 L.Ed. 389] (1911)." 14 reliance error. upheld excise levied corporate income.10 course, subject limitations their powers apply Government. [a] 'values State.' Norfolk & Western R. 390 317, 325 [88 995, 1000, 19 1201]." Moorman Mfg. Bair, 437 267, 273, 2340, 2344, 57 197 court's reasoning would trivialize if "adds riches Wallace Hines, 253 70, 40 435, 437, 64 782 (1920). Income, whatever source, always "business advantage" cases demand more. particular, specify proper inquiry looks unity diversity enterprise," 440, benefit—as virtually will—from 325-329, 3114-3115.11 B 15 we emphasized, "contributions [of result[ed] integration, management, economies scale." 438, If "factors profitability" arising "from operation whole" exist business, can justification consideration connection Ibid. now consider extent, any, 16 There integration. engaged exclusively retailing—the purchase wholesale goods resale final consumers. differs significantly "highly business" locating, processing, marketing resource (such petroleum) previously constitute 224, 2120. 226, 2121 (describing "a stream internal transfers raw materials exploration production refining part"); 428, 1227. Consistent distinction, phase parent's. "who seeing [store] advertising accounting control," undisputed testimony "[e]ach performs functions autonomously independently company." 12a.12 "Each complete department financial staff." 14a. Each own outside counsel. Juris. Statement 34a. further appears centralized manufacturing, warehousing merchandise.13 central training school responsible obtaining financing sources than parent.14 persuasive 17 extent management achievement scale. operated distinct level fulltime possible exception,15 officers current former employee "figure independent, autonomous." 13a. "rotate train countries. personnel." "training program transmit idea merchandising[,] be[,] subsidiaries." 15a. "proceed programs, formal informal. They develop managers instruct them methods operation." 18 decentralization reflected possessed autonomy determine policies respecting primary activity—retailing. According hearing examiner: determining size location stores, market conditions territory mix items sold. German emphasizes soft dresses coats. food. restaurants supermarkets. attempts cater local tastes needs. inventory consists, part, home country produced purchase-at-home practice consistent policy taxpayer. A number purchased Orient places purchase, required particular source." 33a-34a. 20 Importantly, Department's examiner "no section, such, devoted overseeing operations." 34a.16 Neither nor consolidates return companies. 37a-38a. manager he review returns consult decisions affecting taxes. "policy get together periodically discuss overall 35a.17 21 managerial links. maintained several common directors subsidiaries.18 irregular in-person19 "frequent" mail, telephone, teletype communication upper echelons subsidiaries.20 Decisions decisions, creation approved parent.21 35a. published statements, annual reports, prepared consolidated basis.22 22 conclude, facts, principles articulated ASARCO. Except oversight five corporations. proved situation where corporation's Coordination Services Management office provide asserted 23 "long-range planning company, maximization operations, development procedures, activities, maintenance system, advice, public relations, labor sale crude oil materials, coordination 'so obtain optimum short range program.' 211, 2114. 24 company's interrelated so one's "stable" other's "full utilization" capacity. 218, 2117. 225, 2121. "many essential services" "centralized purchasing whose obvious increase profits bulk purchases efficient allocation supplies among retailers." 2120.23 "sales facilitated uniform card packaging, brand names, promotional displays, run national headquarters." 1227, 1230.24 25 critical distinction merchandising multinational business—now familiar—in refined, processed, manufactured products (or parts thereof) countries marketed various often worldwide.25 character flow international trade, interchange personnel, interdependence. uncontradicted demonstrates comparable. Nor sense consistently terms. recognized: "[A]ll commerce [not] necessarily taxable Where payor nothing recipient State, considerations might well preclude apportionability, 441-442, 1233-1234. 27 issue "discrete notable absence "umbrella controlled interaction." Mexico, enterprises, attempting reach "extraterritorial values," 1234, "showing been unconnected the" levy Butler Bros. McColgan, 315 501, 509, 62 701, 705, 86 991 (1942). conclude bear necessary 'to opportunities, benefits, protection conferred afforded J. Penney 311 444 [61 246, 249, 85 267].' Missouri 325, n. 5, 88 1201 (1968), Ott Mississippi Valley Barge Line 336 169, 174, 69 432, 434, 93 585 (1949). III need detained reaching amounts even recognized "fictitious." computation "deems" calculation. [for purpose] corporation." H.R.Rep.No. 1447, 87th Cong., 2d Sess., A83 (1962). S.Rep.No. 1881, 227 effort "deemed received"—with contributed nothing—also contravene Clause.26 IV 29 judgment 30 ordered. 31 O'CONNOR, whom BLACKMUN REHNQUIST join, dissenting. 32 Co.: GmbH (Germany), Ltd. (Canada), (Mexico), (England). Mexican subsidiary. During apparently somewhat respective markets, "mail, subsidiaries" 'frequent.' Ante, 368 (footnote omitted) (quoting 34a). Moreover, "[d]ecisions parent," "Woolworth's basis." 368-369 (citations footnotes omitted). 33 geographically diverse markets line itself, simply "unrelated,"1 enterprise[s],"2 "hav[ing] activities"3 Because I disagree redefinition limits Court, reasons expressed my dissent 331, 3117, 787, case, respectfully 2,000 39a, Canadian 500, 24a, 12. 28a. owns, size. '[B]usiness means transactions regular course trade includes tangible intangible property acquisition, disposition integral § 7-4-2(A) "All multiplying fraction, numerator factor plus payroll factor, denominator three." 7-4-10 average real personal rented period period." 7-4-11. total taxpayer compensation, compensation everywhere 7-4-14. period, 7-4-16. '[N]onbusiness income." 7-4-2(D) "Rents royalties property, gains, interest, dividends, patent copyright royalties, nonbusiness provided Sections 9[7-4-6 7-4-9 NMSA 1978] Act." 7-4-5 (1981) (emphasis added). "Interest allocable state." 7-4-8. defines "commercial domicile" directed managed." 7-4-2(B). "If chooses benefits subpart subchapter N (relating year, equal section 902(a) stockholder corporation) title 78 subpart, imposed chapter credited sectio[n] 902. 901(a). "For percent voting receives proportion accumulated paid, (determined without regard 78) bears excess (other paid)." 902(a). example: earns $100, pays $40, $30 after-tax $60, 30/60 x $20. $50 (i.e., actual $20 'gross-up') Brief 6, 4. CFR 1.78-1, 1.902-1(h), (k) (1982); 222-228 (1962), U.S.Code Cong. Admin.News 1962, p. 3304; A79-A84 (1962); B. Bittker, Estates Gifts ¶ 69.2 Only witness—Woolworth's manager—appeared before examiner. introduced return, notice assessment, worksheets, protest, regulations. one-page diagram structure. Appellee. given referred uncontroverted unless otherwise noted. mention gain. 30a-38a. refer ruled erred reasonable passed treasury stockholders, using purposes. burden proof Consequently, held, inference supportable contrary. apportionment formula adjusted apportionable. 529-530, 38-39. dissenting justice founded his position "agree[ment] analysis Appeals." 530, 39. discussed subjected 144-145, 346. thought significant commingled funds 38; 9, supra. subverts unitary-business limitation. All income—irrespective generated 1232—would become corporations, not. examiner, see 7, focused primarily confined following: "Q. Now, like to[,] repeating every may[,] ask summary concerning talking merchandise mix, items[,] you similarity U. Canada things decentralized? "A. Yes, philosophy companies." 18a. undertake controvert implications statement, neither courts below difference relationships assume paralleled material respects. back forth goods" cited statement. finding. "any inter-company inventory." witness certain types lacked knowledge intercompany sales. He continued "inconceivable me autonomous lack facets." 43a. Upon questioning, conceded "really know [the managers] buy merchandise." affirmed "virtually nil." 44a. When questioned utilized buying replied No indicated joint functions. find otherwise. outstanding debts 35a, reinvested company. 51a. 52a, last additional contribution could recall, 46a, $400,000 transfer demolished World War II. 30a. "[i]n involved, subsidiarie[s'] currently formerly employees parent." Without explanation, later "[a]t officer [was] [parent]." One participant profit-sharing plan. employee's share vice president liaison man smaller subsidiaries," ibid., Spanish 50a. time contact hasn't that" response questions "all operations" ever "get talk going what doing tomorrow ten years today? Planning future programs expansion?" managing director sat directors, sent participate meetings board person who board." Cf. 41a members board). Although make connection, "some taxpayer, sit Board 29a. "It rare occasion, once year," "managing directors" come only sporadically represented [English company's] meetings." 40a. Further, while chief executive "on occasion" travel confer managers, "hard discern pattern monthly visits quarterly visits." 35 a. information contacts Chief Executive Director Purchases Purchasing 37a. people finance day-to-day doubt dollars seek permission really borrowings on, am sure Canadians borrowing 26a. More generally, "[n]ormally, think borrowing, unusual amount, necessitate checking stockholders Directors." statements. Keesling Warren, Unitary Concept Allocation Hastings L.J. 42, 52 (1960) ("Central instance, savings, most instances trifling comparison [involved]. Alone considered, too weak connecting link bind otherwise, operational standpoint, considered separate businesses"). noted, consolidation returns. addition links set text, plain utilize "F. Woolworth" name. significance gave weight name when sustaining 508, 704, relied upon Bass, Ratcliff Gretton, 266 271, 45 82, 282 (1924): "A ale Great Britain sold objected grounds York's imposition franchise net sustained strength earlier Underwood Typewriter Chamberlain, [254 113, 41 45, 165 (1920) ], similar applied brewer carried involving 'a series beginning manufacture England York places'. 282, 84." comparable "series transactions" linking Hans Rees' Sons North Carolina ex rel. Maxwell, 283 123, 133, 385, 388, 75 879 (1931) ("Undoubtedly, manufactures product ordinarily realization profits"); Hellerstein, Recent Developments Apportionment Circumscription Business, Nat.Tax 487, 496 (1968) ("Manufacturing selling another, transportation states typical unitary"); G. Altman Keesling, 101-102 (1946). treatment i; i. therefore pass gain—a below. nn. 7-9, (1980).

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