Source: https://supreme.justia.com/cases/federal/us/315/501/
Timestamp: 2019-04-25 15:50:16+00:00

Document:
1. In the application of a state statute imposing on corporations doing business within and without the State a franchise tax measured by a percentage of the net income derived from business within the State, a formula which is "fairly calculated" to allocate to the State that portion of the net income "reasonably attributable" to the business done there satisfies the requirements of the Fourteenth Amendment. P. 315 U. S. 506.
2. One who attacks a formula for determining, under a taxing statute, the amount of net income allocable to the State has the burden of showing by clear and cogent evidence that it results in extraterritorial values' being taxed. P. 315 U. S. 507.
3. A wholesale merchandise corporation operated, as a unitary business, stores in several States, including one in California. It maintained a central buying division which served all the stores.
In 1935, it had a substantial profit, although the California store, on a separate accounting basis, showed a loss. The tax commissioner of California allocated to that State a percentage of the net income, and based thereon a tax under the state Bank and Corporation Franchise Tax Act. That percentage was determined by averaging the percentages which (a) value of real and tangible personal property, (b) wages, salaries, commissions and other compensation of employees, and (c) gross sales, less returns and allowances, attributable to the California store bore to the corresponding items of all the stores.
(1) That the formula of apportionment did not violate the Fourteenth Amendment. P. 315 U. S. 506.
(2) The fact that the accounting system of the California branch attributed no net income to that State did not prove that the tax was on extraterritorial values, since accounting practices for income statements may vary considerably according to the problem at hand, and a particular accounting system, though useful or necessary as a business aid, may not fit the different requirements when a State seeks to tax values created by business within its borders. P. 315 U. S. 507.
4. The ruling in Saunders v. Shaw, 244 U. S. 317, relative to lack of due process where a state supreme court finally disposed of a case on a new point against which the defeated party had had no opportunity or occasion to make defense held inapplicable to the situation in the case at bar, in which it was claimed that the appellate court departed from provisions of the stipulation of fact upon which the case was tried. P. 315 U. S. 510.
17 Cal.2d 664, 111 P.2d 334, affirmed.
Appeal from the affirmance of a judgment against the appellant in a suit to recover the amount of a state tax.
"If the entire business of the bank or corporation is done within this State, the tax shall be according to or measured by its entire net income, and if the entire business of such bank or corporation is not done within this State, the tax shall be according to or measured by that portion thereof which is derived from business done within this State. The portion of net income derived from business done within this State shall be determined by an allocation upon the basis of sales, purchases, expenses of manufacturer, payroll, value and situs of tangible property, or by reference to these or other factors, or by such other method of allocation as is fairly calculated to assign to the State the portion of net income reasonably attributable to the business done within this State and to avoid subjecting the taxpayer to double taxation."
in California during 1935 at a loss of $82,851. The tax commissioner made an additional assessment of $3,798.43, which appellant paid, together with interest, under protest. This suit was brought to recover back the amount so paid on the theory that the method of allocation employed by the tax commissioner attributed to California income derived wholly from business done without that State.
for the benefit of all the houses and allocated to them. No question exists as to the accuracy of the amounts of such expense or the method of allocation. The latter admittedly followed recognized accounting principles. For the year 1935, the amount of such allocated expense charged to the San Francisco house was $100,091. For purposes of this suit, it was agreed that approximately 75% of that amount would have been incurred even though the San Francisco house was not operated. The accuracy and propriety of the basis of allocation of those common expenses for 1935 were admitted. Included in such expenses were executive salaries, certain accounting expenses, the cost of operating a central buying division, and a central advertising division. Except for such common expenses, each house is operated independently of each other house. Appellant computed its income from the San Francisco house for the period in question by deducting from the gross receipts from sales in California the cost of such merchandise, the direct expense of the San Francisco house, and the indirect expense allocated to it. By that computation, a loss of $82,851 was determined. In the year 1935, the operations of all houses of appellant produced a profit of $1,149,677. The tax commissioner allocated to California 8.1372 percent. of that amount. That percentage was determined by averaging the percentages which (a) value of real and tangible personal property, (b) wages, salaries, commissions, and other compensation of employees, and (c) gross sales, less returns and allowances, attributable to the San Francisco house bore to the corresponding items of all houses of appellant. No other factor or method of allocation was considered. The propriety of the use of that formula is not questioned if, by reason of the stipulated facts, a formula for allocation to California of a portion of appellant's income from all sources is proper.
"in an amount equal to the purchases made for the account of the San Francisco house results in no more favorable prices than could be obtainable in respect of purchases in an amount equal to the purchases which would be made"
"a reduction in the volume of purchases in an amount equal to the purchases made for the San Francisco house would result in no less favorable prices being obtainable in respect of the purchases which would be made for the remaining houses"
Hans Rees' Sons, Inc. v. North Carolina, 283 U. S. 123, constitutes appellant's chief support in its attack on the formula employed and the tax imposed by California. Appellant maintains that the use of the formula in question resulted in converting a loss of $82,851 into a profit of over $93,500, and that the difference of some $175,000 has either been created out of nothing or has been appropriated by California from other states.
308 U. S. 331. Hence, if the formula which was employed meets those standards, any constitutional question arising under the Fourteenth Amendment is at an end.
One who attacks a formula of apportionment carriers a distinct burden of showing by "clear and cogent evidence" that it results in extraterritorial values being taxed. See Norfolk & Western Ry. Co. v. North Carolina, 297 U. S. 682, 297 U. S. 688. This Court held in Hans Rees' Sons, Inc. v. North Carolina, supra, p. 283 U. S. 135, that that burden had been maintained on a showing by the taxpayer that, "in any aspect of the evidence," its income attributable to North Carolina was "out of all appropriate proportion to the business" transacted by the taxpayer in that State. No such showing has been made here.
used may not reveal the facts basic to the State's determination. Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, supra, p. 266 U. S. 283. In either aspect of the matter, the results of the accounting system employed by appellant do not impeach the validity of propriety of the formula which California has applied here.
". . . the enterprise of a corporation which manufactures and sells its manufactured product is ordinarily a unitary business, and all the factors in that enterprise are essential to the realization of profits."
have no effect on the purchasing power, the omission of sales in an equal amount wherever made would likewise have no effect on the company's ability to purchase at a saving. Thus, by proceeding in turn from state to state, it could be shown that none of the sales in any of the states should be credited with the income resulting from the purchasing of goods in large quantities."
Nor are there any facts shown which permit the conclusion that the other advantages of centralized management (Great Atlantic & Pacific Tea Co. v. Grosjean, supra) are attributable to other branches, but not to the one in California. The fact of the matter is that appellant has not shown the precise sources of its net income of $1,149,677. If factors which are responsible for that net income are present in other States but not present in California, they have not been revealed. At least in absence of that proof, California was justified in assuming that the San Francisco branch contributed its aliquot share to the advantages of centralized management of this unitary enterprise and to the net income earned.
We cannot say that property, payroll, and sales are inappropriate ingredients of an apportionment formula. We agree with the Supreme Court of California that these factors may properly be deemed to reflect "the relative contribution of the activities in the various states to the production of the total unitary income," so as to allocate to California its just proportion of the profits earned by appellant from this unitary business. And no showing has been made that income unconnected with the unitary business has been used in the formula.
"the Court deems that it is bound by any inference or presumption respecting the assessment made by the Commissioner, or that this stipulation fails to establish any fact necessary to a decision, the case shall be reopened for the taking of further proofs in respect thereof."
"appellant has not furnished any explanation of why its California business differs so from the average that the formula produced an erroneous result."
The petition for rehearing was denied. Appellant now asserts that it has been denied procedural due process under the rule of Saunders v. Shaw, 244 U. S. 317. We do not agree. The Supreme Court of California created no innovation and sprung no surprise when it placed on appellant the burden of establishing that the formula taxed extraterritorial values. As we have noted, that is settled doctrine. Appellant had a full opportunity to be heard on the issues which it tendered.

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