William H. Rehnquist: We will hear arguments next in No. 86-98, Gregory L. Rivera versus Jean Marie Minnich. Mr. Campbell, you may proceed whenever you are ready.
William Watt Campbell: Mr. Chief Justice, and may it please the Court, the issue in this case is whether a man can be determined to be the father of an illegitimate child with the associated stigma and impact on himself and his family by the same quality of proof as is used in the ordinary civil case. The paternity case is not like an ordinary civil case about money, as my opponents would have you believe. A paternity case is not like a collection case or a slip and fall case. If you look at the effects of the judgment entered and the parties involved, you will see the difference. First of all, this judgment is enforced by jail. This is not a judgment which is enforced just against the debtor's property, but it is enforced against him. Once the order is entered, the court monitors his address and his employment for the remainder of the effect of that order. There is a wage attachment provision, and this is a provision that does not exist in any other civil judgments in Pennsylvania. Week to week, paycheck to paycheck, the effect of this judgment is felt. There is no relief in bankruptcy. The defendant loses the freedom to change his employment based on a court's perception of his earning capacity. He can't go from a salaried position to self-employment. He can't bankrupt out of this judgment, but none of these deal with the most important effect of this judgment. This judgment makes a permanent decision as to who is the father of this child. The parties involved... I will get back to that. The parties involved are entirely different. Plaintiff's interest, as my opponents concede, is purely economic, getting money. But the child has what has been termed in Little versus Streeter as a compelling interest in the accuracy of the determination and so does the defendant. The government weighs in heavily on the side of the plaintiff in every support and paternity case, not just the welfare cases, as here, but through the 4D program, this plaintiff and all plaintiffs in support actions have been afforded postponed and reduced filing fees, streamlined pleading systems, subsidized costs of prosecution, and there are two examples in this case which are of particular interest. In this case the government provided the plaintiff with an attorney and the government flew in the blood test expert for the trial at no cost to the plaintiff.
William H. Rehnquist: What do the four D's stand for, Mr. Campbell?
William Watt Campbell: Chief Justice Rehnquist, the 4D program is the popular name for the provision of the Social Security Act through which the Federal Government funds the child support enforcement programs in the 50 states.
William H. Rehnquist: Oh, it refers to a section of the statute?
William Watt Campbell: It is a title of the statute, Chief Justice Rehnquist.
William H. Rehnquist: It is not like 4R?
William Watt Campbell: No. No, sir. And finally, with reference to the difference in the nature of the parties in a civil action, the child, who is the one who is supposed to be the beneficiary of the money, and the one who bears the effect of the decision of paternity, is not even a party. This welfare support case was begun under government compulsion. Jean Marie Minnich was required to name a father and cooperate in a prosecution of someone in order to get welfare benefits, so these cases aren't just like the ordinary money case. It may start as a case seeking money, but where paternity is at issue the defendant's freedom of personal choice in family matters is implicated. Now, this Court has dealt with this freedom of choice most usually in terms of an existing family unit, but for two reasons, logically and otherwise, that freedom must include the freedom not to become a parent by a judicial determination. Furthermore, whatever the merits of the ultimate issue of abortion, in Roe versus Wade this Court recognized the freedom of someone, in that case a pregnant woman, not to continue to term, not to become a parent because--
Antonin Scalia: You don't really... you are putting it too strongly. I wouldn't want someone to make me a parent without my consent, but you are just saying you bear some of the consequences of parenthood. If this individual is not in fact the father he still knows he is not the father and he feels none of the moral obligation of fatherhood. It is not making somebody a father against his consent. It is just subjecting him to some of the economic consequences that he would be subjected to if he were a father. So it is still money you are talking about.
William Watt Campbell: --Justice Scalia, I would respectfully disagree with that. There is the harm of the unwanted relationship. Our society does not take the label of father lightly. We do not want to assume that in every case where someone is determined to be the father you pay the money, you don't have to do anything else, Society does expect people who are named as fathers to be fathers.
Antonin Scalia: Can society enforce that upon him except financially?
William Watt Campbell: Justice Scalia, it is correct that a lot of those expectations cannot be enforced, but legally enforceable expectations aren't the only considerations that have been taken into account. In Santosky versus Kramer, the Court considered many interests of parents which are not judicially enforceable. You cannot make a parent raise their children morally or make sure they go to school after high school if that is appropriate for them, but still the court considered the role of a parent as our society, as our society expects, and not... the Court doesn't just look to money. The other family matters which are implicated in a paternity case are, as I have said, the harm of an unwanted relationship, and the harm of this judicially determined relationship on an existing family. In this case my client is married and has a child of that marriage. Through this determination he can be labeled as an adulterer. The Pennsylvania Supreme Court in considering the state law noted that he would have a responsibility for the health, wealth, and education of the child, which may go beyond legally enforceable money considerations. Most important, perhaps, is that this is a final and irreversible determination of who this child's father is, and for the child there are interests in terms of determining what is the heritage of the child, what is the medical and genetic history, and finally the emotional and psychological impact. It defies common sense and common experience to try to tell this Court that saying someone is the father will only result in the payment of money. That child is going to have someone identified to them as the father. That is why the child has that compelling interest in the accuracy. It will have lifelong consequences far beyond any $20 per week.
Antonin Scalia: Now, as far as the child is concerned I don't know how this cuts either way. Do you think you are likely to get a more accurate determination as far as the child is concerned by requiring a higher burden of proof?
William Watt Campbell: Yes, I do.
Antonin Scalia: That means that unless you prove beyond a mere preponderance that this individual is the father, although he may be the father, you come out with a verdict by a Court that he is not the father, right?
William Watt Campbell: It is true--
Antonin Scalia: Even though he is and you know, if you went on a preponderance he would have been found to be.
William Watt Campbell: --It is true that there are risks of error in either direction, but a child will be harmed by an erroneous... a child will be harmed either way, but when--
Antonin Scalia: The risk is greater when you require more of a preponderance.
William Watt Campbell: --The kind of evidence the plaintiff must use to prove their case calls for an increased burden of proof in order to instruct the factfinder to proceed more cautiously so that we may have more confidence in the decision. The three kinds of evidence I am about to discuss were all used in this case, because if the plaintiff loses they lose money If the defendant loses, there are lifelong ramifications.
Antonin Scalia: It doesn't tell the factfinder to proceed more cautiously. It tells the factfinder even though you believe that this person is the child's father, you should come back with a verdict that he is not the father.
William Watt Campbell: Absolutely not, Justice Scalia. The preponderance standard says that if you look at the evidence and you decide that the plaintiff has proved her claim more likely than not by weight to the slightest degree then you must find in favor of the plaintiff. You have said they would find against even though they believed it. That is not right. The clear and convincing standard would tell them you may find him to be the father if you are clearly convinced of the truth of her claim, and let's look at the kinds of evidence that is used in paternity cases to make this claim. The blood tests. In this case the blood test results were 18 to 1, 94.6 percent. Now, what this means is that if I walked out of the Lancaster County Courthouse, turned down Duke Street, and picked up 19 Hispanic males at random, one of them could be the father, and if I went further and picked up 38, there could be two of them. In a group of 57 Hispanic males just in that town alone there could be three biologically possible fathers. This statistical evidence is very difficult to understand for lawyers. I suggest it is much more difficult for juries. That is why, as Chief Justice Rehnquist pointed out in Mills, the traditional evidence becomes more important. When we look at that evidence, that--
William H. Rehnquist: Is the blood test evidence that you have just described, is that admissible no matter how little probative it may be of the defendant's paternity? I mean, is it like a drunken driving statute where you have to have a certain minimum before it is admissible?
William Watt Campbell: --No, Chief Justice Rehnquist. I believe that may be the practice in some states, but in Pennsylvania these probability results in the HLA blood test are admissible in any case.
Byron R. White: I would think you would be... on reasonable doubt standard if it is... 19 to 1, you say?
William Watt Campbell: Eighteen to one, that's right.
Byron R. White: Eighteen to one.
William Watt Campbell: Well, the reason I have not asked for the beyond the reasonable doubt standard, I think there is some language in Addington versus Texas which would explain why it would not be appropriate for me to do that because of the use of scientific evidence.
Byron R. White: So should the jury be told that under your standard clear and convincing, and that means that proof that it is 18 to 1 that he is the father isn't good enough?
William Watt Campbell: Well, all the probability, all the probability results do is supposedly help the jury consider the rest of the evidence. As Chief Justice Rehnquist pointed out in Mills, once you get into cases where there is a probability where the man is not excluded, you are in trial, and you look--
Byron R. White: What did the blood test show?
William Watt Campbell: --The blood tests results were expressed in two fashions.
Byron R. White: I may not have... go ahead.
William Watt Campbell: An 18 to 1 odds that he was the father.
Byron R. White: That he was the father.
William Watt Campbell: Right.
Byron R. White: One chance out of 18? No, 18--
William Watt Campbell: One out of 19. There was one out of every group of 19 Hispanic males capable of impregnating a woman, one of them could be the father based on blood samples taken from the three parties.
Byron R. White: --Yes, but the odds were 18 to one that he was the father?
William Watt Campbell: Eighteen to one....
Byron R. White: That he was the father.
William Watt Campbell: Not that he was the father, but that a person with his blood characteristics was the father.
Speaker: Exactly.
William Watt Campbell: Therefore you go over into the traditional evidence, who did what to whom and what happened nine months later, and I think it is a statement that has been often repeated, it is a statement that is about 30 years old, but it is very accurate. There are not eye witnesses in paternity cases, and that statement is that social pressures conspire to produce silence or deliberate falsity in these kinds of cases.
Speaker: What was the other test? What was the other way the blood tests were--
William Watt Campbell: 94.6 percent, which only means that 94.6 percent of Hispanic males aren't the father, 5.4 percent could biologically be the father, and as this AMA-ABA report that everybody talks about, all the opinions of this Court discussing blood tests have cited this, as they point out, there are a lot of statistical assumptions in this case which raise possible due process issues, and I submit that this is one such issue. The third kind of evidence, something that was done in this case and something that according to my research can be done around the country, the plaintiff was permitted to bring my client up in front of the jury, put the baby and the mother next to him, and ask the jury to look to see if they could see a resemblance.
Speaker: --Isn't that required by Pennsylvania law?
William Watt Campbell: Justice Marshall, that is not required by Pennsylvania law.
Speaker: It used to be.
William Watt Campbell: Well, it is not permitted... it is not done any more. These three kinds of evidence each contain opportunities to snow the jury, to confuse the jury. What is the best way to tell the jury to proceed with caution? The best way is to set the basic rule, and the basic rule should be contained in the burden of proof.
Speaker: You made this argument to the Pennsylvania legislature?
William Watt Campbell: No, I have not.
Speaker: I mean that may well be. It may well be a very good idea, but is it so clearly so that it is a matter of Federal constitutional law? I mean, that is the issue we confront, right?
William Watt Campbell: I think it is. Whenever there is... a burden of proof can... a burden of proof may be set by the legislature but as each of the burden of proof cases here have said, only within the confines of the due process clause. I suggest they didn't think about it when they took it from a criminal prosecution to a civil prosecution and I was unable to locate any legislative history whatsoever on the point. Now, my opponents say that this case just reduces to money and urge the Court only to see the dollar sign in this paternity order. They distinguish Santosky as protecting a family unit, and that this just concerns one person. Constitutionally there is just as much at stake here as there was in Santosky because Santosky was not written to protect Ozzie and Harriet. Santosky was written to protect John and Annie Santosky, who were two people whose children had already been taken away from them based on allegations and some preliminary findings of abuse and neglect. What this Court protected was general concept of parenting, what it is to be a parent, and what it is to be a parent is just as much at stake in a paternity case as it is in a termination case. To say otherwise would diminish society's expectation of what is it to be a father. I ask this Court to caution the factfinder to proceed in these cases with great deliberation and to use the clear and convincing standard. I will reserve my remaining time.
William H. Rehnquist: Thank you, Mr. Campbell. We will hear now from you, Ms. Barton.
Mary Louise Barton: Mr. Chief Justice, and may it please the Court, the interest of the states in family matters has well been respected by the court in both theory and precedent. As to the evidentiary standard in a paternity proceeding <forty-one> [= 41] states have seen fit to choose the preponderant standard of evidence to prove paternity.
William H. Rehnquist: How many states, Ms. Barton?
Mary Louise Barton: Forty-one, Mr. Chief Justice. This Court is required to correct clear constitutional violations in state statutes in order to ensure constitutional fairness. An analysis of the due process clause as it relates to the preponderant standard of proof in a paternity proceeding demonstrates that there is no clear constitutional violation in the state's choice of this particular evidentiary standard. Furthermore, the preponderance standard of the evidence in this context assures fairness to all the parties. Appellant's main contention is that his rights are the same as the parents in Santosky versus Kramer. Appellant argues that his lack of parental ties are as deserving of the sane constitutional protection at those parents who had formed a parent-child relationship with their children. This is incorrect as a general proposition, Fully developed familial relationships involving the assumption of parental duties with mutual love and affection are entitled to a significantly greater level of due process protection than the inchoate relationship at issue in this case. No court can impose a parent-child relationship. The only thing a court can impose is a support order, and that would mean monetary support. Practically, the interests at stake in a paternity suit are economic on the parts of all the parties. To distinguish Santosky from the case at bar, in Santosky the court was clearly speaking about, as I have already stated, an already established familial relationship with mutual love and affection and a day to day caretaking role on the part of the parents with their children. In Santosky the state was pitted against the parents. The state came in with both feet upon those parents, I will grant you that, In this case, I submit that these interests deal with private parties. The state is there to facilitate. The state is there to give a mother an attorney should she need one, if she is on welfare. The state in Pennsylvania is also there to give an indigent father an attorney via the public defender system, As far as the HLA blood tests, no one any more since Little versus Streeter is denied that opportunity to be heard. Anyone in the United States can get HLA blood tests regardless of their financial or their economic status. The liberty interest at stake in Santosky, as this Court said, could be extinguished forever as a result of this termination proceeding. Here there is no liberty interest at stake. Here there are no familial ties. The only interests at stake are economic. In Santosky the Court said the child will lose the right of support and maintenance from their parents forever upon the termination of parental rights. So what the Court did was, they raised the standard in order to prevent this, in order to protect the child's interests. What the appellant is asking you to do here, they are asking for the child to lose the rights to support and maintenance forever, and they are asking you to raise the standard to cause this result. I submit to you that that result would be unfair and inapposite to what Santosky holds. In Santosky the Court balances the parents' and the child's interests against the state. It decided that the parents' and the child's interests were served by a higher standard. In this case the parents, the father in particular, comes in as an adversary to the child. The Court is asked to balance these interests as adversaries. In Santosky for the majority of the Court the issue was familial bonds. For the dissent in Santosky, the issue was the safety of the child. I submit that the concerns of both the majority and the dissent in Santosky were for the child. I would ask this Court to take this case on those terms as well and to consider the child's interests as you did in Santosky. The issue in this case, I will repeat, is the monetary support. In Santoksy the issue was imprecise substantive standards which left determinations open to the subjective values of one particular judge. In Santosky you mentioned the issues of cultural bias because most of these parents happened to come from poor economic statuses. You mentioned the issue of... there were other issues that you mentioned, the state being able to form the case from the very beginning against the parents and how you as a Court felt that was unfair. In this case the decision is left to either one judge or to a jury of 12. In this particular case the decision was left to a jury of 12. It as civil proceeding. We did not need to have a unanimous decision. However, we did. The HLAs were provided. That is not an imprecise substantive standard, That is empirical medical evidence which is based on the evidence as it comes into the case. Another important issue in Santosky was this Court's concern that the significant prospect of an erroneous termination existed. I submit that in this case there is a small prospect of an erroneous decision due to the medical advancements that we have made in genetic testing, and one of those tests happens to be the HLAs. I would also like to distinguish Little versus Streeter because I feel that is a very important case when it comes to our case here. You used the word, this Court used the word "compelling interests" of both the father and the child in Little versus Streeter, and I believe that the interests were in the accuracy of the determination. I submit that your decision to allow the HLAs to have them accessible to everyone involved cleared up the problem, and I submit it is just one piece of the problem in this case. The HLAs provide empirical scientific evidence they reduce an erroneous determination greatly. There is no longer one person's word against another. If the red blood cell tests are run and the man is excluded, the state does not even bring any kind of a paternity suit. No suit is filed. If the HLAs are then run, if the man is not excluded by the red blood cell tests an HLA test is run and then the father would be included to a greater percent.
William H. Rehnquist: In this 18 to 1 and 19 to 1 findings, is that considered a high probability as these things run, or medium, or what?
Mary Louise Barton: Your Honor, I hesitate to answer that question. I have seen them based on different genetic factors to be very high if the parties involved have very rare genetic characteristics. In this case evidently the genetic characteristics were not all that rare. I also understand that because the mother was a white Caucasian and the father was of Hispanic dissent that the statistical tables that were used did not allow the PhDs that figure out the statistical results to come up with as high perhaps a standard as they might have had there been two white people involved or two black people involved or something like that, Your Honor. In Little versus Streeter I submit that the father, the putative father was denied due process. I think it was a horrendous denial of due process. The odds were stacked against that father. That is not the facts here, I submit. The facts here, as far as fairness in procedure, this father as well as the mother and child were given the right to a hearing before a domestic relations hearing officer at which time paternity could be acknowledged or denied if paternity was denied the HLA blood tests become a standard procedure then. They are automatically ordered. The parties appear for HLA blood tests. After the HLA blood tests are returned the father has another hearing before a domestic relations hearing officer, an officer of the court. At that time once again he may deny or acknowledge. If he continues to deny after the HLA blood tests have included him to a large percentage he has the choice of a jury trial or a bench trial. That choice may be made by the mother as well. She could have opted for a jury or bench trial as well. Also at that time, of course, the public defender system exists for the father to use, and I represent the district attorney's office. The district attorney's office exists for the mother to use. I submit that as far as fairness of procedure both sides are given exactly the same procedural safeguards. I will restate it. The issue in Streeter was accuracy, and I believe that your decision was absolutely correct. I also believe that the burden of proof as Justice Scalia mentioned earlier does not make a decision more accurate. I believe what it does, it shifts the risks of an erroneous decision. In this case the appellant asks you to shift the risk to the child. I submit that that is fundamentally unfair to the children. The issue then is whether the preponderant standard fairly allocates the risk of an erroneous factfinding between the parties.
Antonin Scalia: In the vast majority of cases as a practical matter what you are talking about is shifting the risk from the man to the state, no? I mean what most of these cases involve are whether the state is going to get reimbursed for some payments that the states had to make?
Mary Louise Barton: That's correct.
Antonin Scalia: Isn't that generally what is going on?
Mary Louise Barton: Justice Scalia, in my... if I understand it correctly, when the fundamental liberty interests, of course, are at stake then it is a private party versus the state and then, of course, in all fairness the risk should be shifted more towards the state so that an individual cannot be deprived of what is a fundamental liberty interest. In this case I submit that the risk will be shifted to the child, and that is illogical and unjust.
Antonin Scalia: You did mistake my question. As a practical matter, the money that is collected is that likely to go to the child or is it likely to go to the state to reimburse the state for support payments?
Mary Louise Barton: I am sorry, I did misunderstand your question. If the mother and the child are on welfare, Justice Scalia, then the money goes into the state coffers. If the child is not on welfare, then the money goes directly to the mother and the child.
Antonin Scalia: And what percentage of these cases in your experience involve that situation where the real party in interest is the state?
Mary Louise Barton: Since I only get involved in those interests where the state is involved I can't answer that question fairly.
Antonin Scalia: Probably the vast majority of them, though, isn't it?
Mary Louise Barton: I believe that's correct, because I believe the women, the mothers that are not on welfare are then of the next socioeconomic level where they cannot afford to have an attorney. Therefore paternity suits on behalf of their children are never brought. I believe that as the economic scale goes up that more paternity suits would be brought, Your Honor.
Byron R. White: Do you think these blood tests showed that the odds were 18 to 1 that this particular person was the parent? If not, what does the 18 to 1 mean?
Mary Louise Barton: I believe--
Byron R. White: You have said the blood test reduces the risk of error terrifically and it does... if they exclude him, why, he is excluded. Is that the only way that it reduces the risk of error? Does it just show that he could be the father? Or does it make it more likely than not that he is the father?
Mary Louise Barton: --If the odds would be 18 to 1?
Byron R. White: Well, were they? Is that what these blood tests showed?
Mary Louise Barton: I believe they did, Your Honor. The other factor that has to be factored in here is access, and of course that comes in as part of the other evidence. Of course, if--
Byron R. White: I should say--
Mary Louise Barton: --Yes, and if only one person had access, and that person happened to be a person with an 18 to 1 probability of paternity--
Byron R. White: --That is the only direct evidence there was here anyway.
Mary Louise Barton: --Well, that's correct. There was only one person with access. This young woman was 15 years of age, Your Honor, and that is an extremely important part of a case.
Byron R. White: We are not passing on that. We are just passing on the standard of proof. But do you think that the blood tests showed that the odds were 18 to 1 that this particular defendant was the father?
Mary Louise Barton: In all honesty I understand that that is how it is done, and as I tried to explain earlier, I believe the statistical tables that are used at this time when it comes to parents of two different nationalities are not as highly refined as they may be once more of these kind of relationships come forward and we are able to do statistical tables based on more of these kind of relationships as far as genetic markers go, Your Honor.
Antonin Scalia: I didn't understand that that is how the 18 to 1 works. I thought what it was, that if this young woman had 36 people that she had had contact with two could possibly have qualified. That is not it?
Mary Louise Barton: Well, really, in all fairness, I--
Antonin Scalia: That is something quite different from saying that the odds are 18 to 1 that this was the father.
Mary Louise Barton: --To me what you have said would be the same as 18 to 1, but that is why I was not a mathematics major in college. 0 [Generallaughter.]
Antonin Scalia: I am not sure it has anything to do with math. I just think it isn't 18 to 1 that that person was the father. It is just out of any random group of 36 people, or maybe it is out of 36 Hispanics. I don't know how the test was done. Two would qualify. That is quite different from saying 18 to 1 this was the father. Only two would qualify out of 36? I thought it was just the reverse.
Mary Louise Barton: No, that would be correct, but you know, in my brief I have cited several forensic medical articles that deal with HLAs and how the statistical... it is all based on Mendel's theory of probability and Mendel's theory of genetics, and in those articles it is much better explained by medical people who know what they are talking about and in all honesty when it comes to these statistical theories I am not the person to ask.
John Paul Stevens: If you are right about that, doesn't it mean, I mean a clear and convincing standard surely doesn't require 18 to 1 odds? Doesn't it mean you would win no matter what the standard is if this is a typical case? If this is a typical case I wonder if the standard really make much difference.
Mary Louise Barton: Well, Justice Stevens, I believe that it does because I believe that when you go into a suit just because one side has better evidence or more evidence than another, we don't automatically raise the ante on them, and that is what you would be doing here. You would be saying to the child, since you have very good scientific evidence, therefore we require you--
John Paul Stevens: No, you would be saying if you are going to win anyway once you have told the child that we had a trial on this father, we didn't... we don't think there is just a 51 percent chance this is your father. The evidence was clear and convincing that this really your father.
Mary Louise Barton: --Well, I believe that one could say that. However, I don't believe, as I said before, that is how the standard of proof should be decided. I also think, as the other evidence is just as important, and we would never base our whole case on one piece of evidence.
John Paul Stevens: I understand. You have the other evidence. And of course I doubt if you ever have any of these cases where you have nothing but blood test evidence. Don't you always prove access?
Mary Louise Barton: Absolutely.
Antonin Scalia: Well, you have to, because blood test evidence is just not that strong. All it means is that if there are 18 million Hispanics, 1 million Hispanics could have been the father. That is not an 18 to 1 shot that this individual is the father. It is a good deal away from an 18 to 1 shot, isn't it?
Mary Louise Barton: Yes. I do know if this will help at all that when they do transplants, kidney transplants, that they rely on these HLA tests, so I do know that they are very reliable as far as genetic markers go. As far as the probability of paternity goes I can't explain that to you. I apologize. The issue then is whether the preponderance standard fairly allocates the risk of an erroneous factfinding between the parties. The answer is yes. The interests of the father are economic. The interests of the child are economic. The interests of the mother are economic. The interests are therefore of equivalent constitutional significance. The mandate for placing a greater burden on one party stems from the recognition that the other party has a constitutionally protected interest of greater import at stake. The mandate therefore is negated. The interests are of equal significance and are the same. Since the interests are the same how would the due process clause have the risk of error allocated? A higher burden of proof serves no useful constitutional purpose. Any advantage accorded to one party by changing the standard of proof imposes a corresponding disadvantage on the other parties, in this case the child and the mother and the state somewhat. This would accomplish only this. It will visit the condemnation of the parent--
John Paul Stevens: Ms. Barton, I probably shouldn't interrupt you because I have another mathematical question. You argue from the fact that the interests are equal and therefore you should have a 51 percent standard. Supposing I thought the interests of the child were greater, therefore I suppose less than preponderance would be enough to justify prevailing because you want the child to win in as many cases as possible.
Mary Louise Barton: --Correct, but I also want the decision to be fair in as many cases as possible.
Antonin Scalia: That is not the right response. The response is, Justice Stevens, that is precisely what my opponent is arguing. Since the interest of the father is so great, he wants the father to win with less than a preponderance, in a way.
Mary Louise Barton: And if I may borrow a quote from one of this Court's cases, if you would shift the risk to the child, all it would accomplish would be to visit the condemnation of the parents' irresponsible liaison upon the child. This result is illogical and unjust. Moreover, placing this standard of proof disability upon the child is contrary to the basic concept of our system that legal burdens should bear some relationship to the individual responsibility for wrongdoing.
Speaker: 0 xxx.
Mary Louise Barton: I think Webber. Webber. There is no principle basis for contending that the child is better served by decreasing the risk of erroneous findings of paternity at the cost of increasing the risk of erroneous findings of nonpaternity. I will go through again, the appellant has been afforded generous process by the State of Pennsylvania, and I went through those before. I think they are important enough that perhaps I should reiterate. The Rules of Civil Procedure require that appellant receive proper notice upon the filing of a paternity suit. He is afforded a hearing. He is afforded the right to counsel. He is afforded the right to a public defender should he be indigent. He is afforded the right to blood tests. He is afforded the right to a bench or a jury trial and then 12 of his peers would sit to hear the evidence. He is afforded full appellate review as this case well demonstrates. Appellant therefore is afforded the essence of due process, the opportunity to be heard at a meaningful time and in a meaningful way. The suit is comparable to a negligence suit. The bottom line is monetary. The parties here are more private that state. In fact, not all paternity suits have state involvement. Only those in which the child is on welfare have state involvement. Some would argue, as appellant has, that the state is putting pressure on the mother to put the finger on someone. Perhaps that is how some people view it. I submit, however, a fairer way to view it is, the state is watching out for the child's best interests. In some instances the child and mother may assume somewhat of an adversarial role. The mother may still care for the father and not wish to jeopardize that relationship. The father may be paying some voluntary support and the mother may not wish to jeopardize that support. The mother may be very young and intimidated by the legal proceeding or the legal system, precluding her from taking any steps to establish the civil legal relationship between the child and the father. Furthermore, the state does have a responsibility to the taxpayers of the state to recoup some of the money that is being used to support a child that is born out of wedlock. I would therefore ask that for the state of Pennsylvania that this Court affirm the Supreme Court of Pennsylvania and hold that the preponderance of evidence standard of proof chosen by Pennsylvania and 41 other states to be used in paternity suits does not violate the due process clause of the Fourteenth Amendment of the United States Constitution.
William H. Rehnquist: Thank you, Ms. Barton. Mr. Campbell, you have 14 minutes remaining.
William Watt Campbell: Thank you, Mr. Chief Justice. A few brief remarks in rebuttal. First of all, the quote from Webber was very nice, but what is at question here is not an irresponsible liaison. The question is, did it ever happen, and did it result in a parent. So those cases have nothing to do with this case. Those cases and the adoption cases involve people who say they are the father and the children's rights and the fathers' rights. That has nothing to do with the determining whether or not someone actually is the father of a child. Chief Justice Rehnquist, you asked whether an 18 to 1 odds was a low likelihood or a high likelihood or what could it be, and as I pointed out there is no statute saying below a certain result you can't admit the results, but in the AMA-ABA study which I believe this Court is familiar with due to the numerous times it has been cited there is a table showing degrees of likelihood, and starting with practically proved, extremely likely, very likely, and in the 90 to 95 percent range, which is where the 18 to 1 falls, it says likely. I think the Court should be aware of that.
William H. Rehnquist: Of course, you are at 94.6, so you are fairly close to 95.
William Watt Campbell: That's right, but in this case, just another example of why there is tough evidence in this case, in this case I tried to show that Gregg's, my client's brother, had opportunity and access to have sex... this was one of the contentions we were trying to show... that he had sex with her, so he could be the father, and as indicated in the reporter cases and could have been in this case, blood test results don't mean anything else if somebody else had sex with the woman who was related.
Thurgood Marshall: Aren't you arguing to a jury now?
William Watt Campbell: Excuse me?
Thurgood Marshall: Aren't you making a jury argument? Wasn't all this argued to the jury?
William Watt Campbell: Yes, the jury rejected it but--
Thurgood Marshall: All of what you are telling us was argued to the jury.
William Watt Campbell: --That's right, and by a preponderance--
Thurgood Marshall: 0 xxx.
William Watt Campbell: --That's correct. Just to make absolutely sure--
Thurgood Marshall: You still think you are right.
William Watt Campbell: --I am sorry, Justice Marshall?
Thurgood Marshall: You still think you are right.
William Watt Campbell: That is why I am here, Justice Marshall. The 18 to 1 again, that only means that out of 19 randomly selected Hispanic males one could be the father. It means nothing more. Finally, as to the state's involvement in nonwelfare cases, although this is a welfare case, I want to point out again the state is heavily involved in each and every support case as the AMA-ABA guidelines point out. Thank you.
William H. Rehnquist: Thank you, Mr. Campbell. The case is submitted.
Speaker: The honorable Court is now adjourned until Monday next at 10 o'clock.


William H. Rehnquist: We'll hear argument now in No. 91-615, Allied-Signal, Inc., v. the Director of the Division of Taxation. Mr. Hellerstein.
Walter Hellerstein: Mr. Chief Justice and may it please the Court: The essential question now before this Court is whether there must exist some connection beyond the mere jurisdictional presence of the corporation in a State in order for a State to tax an apportioned share of all of that corporation's income. In other words, must a State have some connection with the activities of produced income in order to tax an apportioned share of it? We believe the answer to this question is yes for three reasons that I'd like to state briefly and then return to in more detail. First, a State's power to tax a nondomiciliary taxpayer depends on the benefits and protections that the State provides to the taxpayer's activities in the State. Second, over 100 years of precedent of this Court make it clear that there must be some connection beyond mere ownership between the in-State activities of the corporation and its out-of-State activities before the State can take account of those out-of-State activities in determining the in-State tax liability.
Speaker: Mr.-- --What about a... excuse me. Go ahead. What about a domestic corporation incorporated in the taxing State?
Walter Hellerstein: Justice White, in terms of State tax jurisdiction there clearly are two theories on which jurisdiction can be based, one with regard to nondomiciliary taxpayers is source. Another theory, which is a well-established theory in the tax jurisdiction, is residency, and there is no question that a State of residence or domicile does have power to tax all of a corporation--
Speaker: Even though the income that it includes within the gross income is produced by activities that have absolutely no connection with the State.
Walter Hellerstein: --No, that... Your Honor, the reason underlying the residence principle does not have to do with the particular--
Speaker: Oh, you mean residence just gives a connection no matter where the income comes from.
Walter Hellerstein: --Your Honor, that is a well-established principle--
Speaker: Well, it may be, but the kind of an argument you're making would seem to challenge that.
Walter Hellerstein: --No, Your Honor, because our essential position in this case is that when you have a nondomiciliary that has no connection with the State other than the activities that is engaged in there, the State must provide benefits and protections to those activities. With regard to a resident taxpayer, whether it's an individual or corporation, while in principle the State has power to tax all of the income, that power does in fact yield when there are activities in other States that are taxable by other States.
Speaker: Well, what about a nondomiciliary corporation that is doing business in the State and it's a... and there's no question that the State can tax its share of the income of that corporation because it's doing business there.
Walter Hellerstein: That's correct, Justice White--
Speaker: Now, you would say that that nondomiciliary's corporation income from activities that have absolutely no connection with the State, like investment income--
Walter Hellerstein: --That's correct, Your Honor, because--
Speaker: --Would have... the State could not include it in gross income.
Walter Hellerstein: --That is right, because there has to be an organic connection between the activities of a nondomiciliary taxpayer and its activities outside the State in order for the State to look outside.
Speaker: So there's a difference between a domiciliary corporation and a corporation that is not domiciliary but it's doing business in the State and is taxable there on its activities.
Walter Hellerstein: Yes, Justice White, there is a fundamental difference that underlies, for example, the basic scheme in which the United States taxes--
Speaker: You mean... what you mean is that there's a theory, there's an accepted theory that you can tax a domiciliary corporation on all of its income.
Walter Hellerstein: --Justice White, there is more than a theory, there is a practice going back 100 years, the very basis, for example, that the United States taxes all domestic corporations on income it earns in France or Germany, or wherever, is based on the notion that a domestic... a domiciliary corporation may be taxed on all of its income. What is it that gives the State the power, for example, to tax an individual on all of his income wherever its earned? It's the same residence-based principle, which is as well-established as the source-based principle. However, when we have States seeking to tax the same income, it's quite clear when there's an intersection between those two principles, then it is the source State that generally may prevail over the residence State, because to allow both States to tax would violate the commerce clause.
Speaker: Well, Mr. Hellerstein, I think that probably ASARCO put forward the view that for the nondomiciliary entity to be... for their dividends or income to be taxed in the taxing State that the dividend payor has to be unitary with the payee. Something more is required under ASARCO than just a flow of value into the taxing State from that nondomestic entity. Now, do you think that's a valid requirement?
Walter Hellerstein: Justice O'Connor, we have never taken issue with the proposition that there may be apportionable income, other than income that is related by a unitary relationship between the underlying payor and payee. For example--
Speaker: But there certainly is language in ASARCO that would say just that, isn't there?
Walter Hellerstein: --Yes, Justice O'Connor, there is language, you know, in ASARCO which if read literally and applied to facts that were not at issue in ASARCO might well exclude, for example, income of a foreign products nature or working capital. We have certainly not taken issue with the notion that investments that are integrally related to the taxpayer's operations in the State, organically related... capital that flows in and out of the business, that certainly wouldn't be apportionable, but there is no reason, as New Jersey suggests here, because of this doctrinal foot fault, if that's what it was in ASARCO--
Speaker: So there has to be some flow of value into the State, anyway.
Walter Hellerstein: --We fully agree with that, and indeed--
Speaker: Well, all right. Now, if you agree with that, can you say there is no such value that flowed in here in the circumstances of this case where the purpose of the investment was to acquire enough capital to go ahead and acquire more of the underlying business in the domestic State?
Walter Hellerstein: --Yes, Justice O'Connor, because the only connection here is the very type of connection that this Court has described as attenuated, not organic, that connects every business that's under a single, corporate shell. For example, if--
Speaker: But isn't it something more than that? Maybe it isn't the hard-core definition of working capital, but it's capital for a longer term expansion, in effect.
Walter Hellerstein: --Yes, Justice O'Connor. In that situation, for example, suppose that Bendix had earned income from aerospace operations in New Jersey. Now, Bendix takes that income which is taxed by New Jersey, and now it invests in some other asset having nothing to do with New Jersey... a yak farm in Outer Mongolia... and then it sells the yak farm and it buys a hula hoop factory in South Korea. New Jersey, I suppose, still has some attenuated connection to the original dollar that might have been earned in New Jersey, and sometime in the 21st Century might well be reinvested in New Jersey, but until that income has that connection with New Jersey, even if it had some historical connection with New Jersey or may be poised to be reinvested in New Jersey, to use the phraseology of some of the amicus briefs here, New Jersey does not have that organic connection with that income to tax it, unless you want to fully abandon the notion which has underlay this Court's decision for over 100 years--
Speaker: Well, suppose that in New Jersey the Bendix board of directors meets and they say we have a very high-tech speculative research project we want to conduct in New Jersey. Now, the only reason we're willing to undertake that is because we know we have a very safe, secure investment in ASARCO. There's no checks flowing back and forth, but isn't there a value there that the company relies on?
Walter Hellerstein: --Justice Kennedy, that's precisely the kind of value that the Court said was so attenuated that it could not be included in the apportionable tax base in cases like Fargo v. Hart.
Speaker: But is it attenuated in the real sense? Isn't the example I've given you, the example of a very real business kind of a decision and a business kind of judgment, and isn't this the way a business is properly valued? If you were a banker, you'd certainly want to see the ASARCO balance sheet before you lent any money in New Jersey, if you thought the company was a little on the thin side.
Walter Hellerstein: Well, that's... Justice Kennedy, it's certainly correct that in that attenuated sense, you have a connection. On the other hand, I think it's important to recognize that in Fargo v. Hart, for example, there were bonds worth 15.5 million that the Court recognized in some sense added to the creditworthiness of American Express in Indiana, but Justice Holmes said that was not sufficient. In other words, the mere fact that there was wealth in the corporation, there was money that adds to the riches of the corporation, does not give the State the concrete connection that it needs where it is not a domiciliary State to tax the income of an out-of-State corporation.
Speaker: Well, you say that's attenuated, but I think that's the issue in the case. It seems to me there's a manufacturing analogy that you're relying on here that is not wholly in accord with the way many modern business corporations are formulated and with the way they evaluate their own assets.
Walter Hellerstein: Well, the consequences... the consequences of abandoning the notion that there must, in fact, be a concrete, organic connection between what goes on within the State and what goes on without the State, because under this analysis everything, of course, becomes apportionable, you then have the consequence of throwing everything into the tax base regardless of whether it might have been unitary or not under prior law, and having significant misattributions of income. For example, suppose we have... to go back to the example we had in the original argument of this case, you have a series of beauty parlors in New Jersey, wholly unrelated parking lots in California. Now, in some general sense the parking lots are adding to the wealth of the business. There's a connection there.
Speaker: Suppose the beauty parlors are not doing well and they borrow money, does it make a difference to taxation whether or not the banker looks at the balance sheet to see that the parking lots are in the balance sheet?
Walter Hellerstein: If the corporation goes to a third-party banking institution and borrows based on its overall wealth, it might well make a difference to the bank as to whether or not it was willing to make the loan, but that is precisely the kind of overall attenuated notion that has never been the basis for allowing States to tax income. We're talking now about income from activity such as the parking lot, or the investment, which itself is not generated by any activities in the taxing State. In other words, to go into this parking lot example, what protections or benefits has New Jersey provided to the parking lots in California that would allow it to tax that income? The Court has always said there must be some connection. Now, you've suggested a loan. Clearly, if there were interconnections between the parking lot and the beauty parlors that might well justify looking to the entire unitary business, but once you say that any time anything is under a single corporate entity and in some general sense may add to the wealth of the corporation, this is simply abandoning the underlying notions that justify a portion of it in the first place. Why do we... one thing, why is it the States have been allowed to look outside the State? We start with a notion that States are confined territorially in their tax power. Now, the original notion was, going back to the earlier cases, there must be some organic connection because as a limited exception to the principle that States may only tax within the State when in fact there's a connection between what goes on within the State and what goes on outside the State, then the limited purpose of determining the value of what's in the State, it may be appropriate to look outside the State. Then the Court said of course, in cases like Wallace v. Hines and Fargo v. Hart, and in ASARCO and Woolworth, when you're looking outside the State you may not sweep into that tax base these unrelated assets. You can't sweep in these bonds, you can't sweep in the parking lot or the yak farm, or whatever it might be. Now New Jersey says, oh, this is all so difficult. We can't distinguish. There are these flows going back and forth. In effect, New Jersey is... would bite the hand that feeds them. The first... the only reason New Jersey could look outside in the first place was because of this organic connection. Now New Jersey says, let's abandon any notion of organic connection. Let's just sweep it all in when it's too difficult. Now, wholly apart from the theoretical flaws in New Jersey's approach, the practical consequences of adopting New Jersey's scheme, they're absolutely astounding when you think about the existing structure that's grown up around this Court's understanding of the limits on State taxation. Over 30 State laws are based on the very distinction that underlies the unitary business principle, namely identifying income that's organically connected and is therefore apportionable because of its link, and income which is nonbusiness, which is not included. All of these... if this Court were to adopt the notion that New Jersey has advanced here that everything gets swept in simply because it's within the corporation and has some attenuated connection, you have in effect invalidated the laws of 30 States. Why? Because this Court has made it clear that taxation by allocation... that is, sending all of the value to a single State and taxation by apportionment, allowing all the States to allow a piece of it, is theoretically incommensurate. It would lead to inevitable multiple taxation. If New Jersey, for example, can tax the gain from raw land that this hypothetical corporation has in Florida, or from investment in an unrelated metal mines corporation, New Jersey gets an apportioned share of that. At the same time, under the existing States' regimes, Florida would tax 100 percent of it. Well, because it's raw land in Florida. It's got a connection. It's nonbusiness, allocable income. Who would get the gain from the metal minings company would be whatever the commercial domicile was under the principle that a commercial domicile has in effect the residuary power.
Speaker: Well, Florida can surely tax the real estate located in Florida.
Walter Hellerstein: That's correct, Chief Justice Rehnquist, and as a result of that combined with New Jersey's alleged power to tax an apportioned share--
Speaker: Of income.
Walter Hellerstein: --You're talking about the gain now.
Speaker: A what?
Walter Hellerstein: I was assuming that you had land in Florida and that the land was sold at a gain. Now, Florida would clearly tax 100 percent of that gain because this was land unrelated to any business of the corporation and therefore would be regarded by Florida as nonbusiness income taxable in full in Florida. At the same time, New Jersey, simply because this land was held by the same corporation under a single corporation that owned beauty parlors in New Jersey, they would say this is part of the business, we can tax an apportioned share of that income.
Speaker: Yes. They'd put it in the, what, the numerator--
Walter Hellerstein: Well, they would put it--
Speaker: --And the denominator.
Walter Hellerstein: --They would put it in the apportionable tax base.
Speaker: Well, what's wrong with that?
Walter Hellerstein: What's wrong with that is that it would lead to multiple taxation, because the same income... the same income has already been taxed in Florida.
Speaker: Well, in a very general way, perhaps, but there's no terribly fire-strict prohibition against that sort of multiple taxation, is there?
Walter Hellerstein: Well, Chief Justice Rehnquist, this Court has made it clear in cases such as Standard Oil v. Peck and as recently as Mobil that the intersection of a regime of allocation, let us say 100 percent of the tax base were to again go into one State, then that collides with a regime of apportionment, that the two cannot coexist. One must yield, and in general what the Court has indicated in that situation is that the State that must yield is the State of--
Speaker: That may be true as a generality, but I mean I think what you've just pointed out, perhaps, is arguably a rather small exception to it. You know, land located in Florida, a traditionally absolutely immobile thing, has always been subject to taxation by the State where it's located, and a tax on a capital gain resulting from the sale of that land, I'm not sure that would come under the head of double taxation if New Jersey also just seeks to tax a proportionate share of the income.
Walter Hellerstein: --Well, Chief Justice Rehnquist, we're not just talking about the sale of an isolated piece of land, we're talking about the sale, for example, of all stocks, bonds, all the capital gains that are at issue in this case, which incidentally would not find any reflection in the factors underlying New Jersey's apportionment scheme. That is, what New Jersey wants to do... take this case. There is $56 million of apportionable tax base. That was the pie we started with. New Jersey says, well, because there's some connection between what's going on in New Jersey and this ASARCO gain, we want to increase the tax base by $211 million, and how do we... what do we do about that? Do we make any adjustment in the factors... well, we'll put the receipts... we'll let the receipts be... not even the receipts, but capital gain, go into the numerator of the receipts factor which is measured in the billions, so there's virtually no effect on the amount, of the share of the pie. All that's happened is that the pie has expanded enormously, and the question--
Speaker: Mr.... well, go ahead. I want to ask a question when you have a moment.
Walter Hellerstein: --Yes, Justice.
Speaker: More than half the States have adopted something called the Uniform Division of Income for Tax Purposes Act, called UDITPA, and under UDITPA, as I understand it, it would say... it would define what is business income, and it would say that business income is taxable by the State, and that it includes income from intangibles if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operation. Now, do you think that is valid, a valid concept?
Walter Hellerstein: Justice O'Connor, we are quite satisfied with that definition, which we believe actually reflects the longstanding dichotomy that this Court has drawn between apportionable and allocable income.
Speaker: Do you think that the Constitution allows that but not one step further in terms of defining taxable income?
Walter Hellerstein: Justice O'Connor, certainly, as the Constitution has been understood up to today, the understanding is very clear that merely because... and this is the New Jersey position here... merely because an asset or income is earned by a single corporation that happens to be doing business in the State, it's absolutely clear that that does not constitute a sufficient connection. Now you're asking the question whether or not the UDITPA definition is one, if stretched a bit, would be satisfactory. Well, I think the Court gave the right answer in ASARCO when it said the stretching of this to the point of oblivion, where you simply look at the corporate purpose, is unsatisfactory. We concede, and we are... let's say we're sympathetic to certain aspects of your dissent in the ASARCO opinion with regard to the facts of that case. It could well have been that the flows of value between ASARCO and Southern Peru should have justified a different holding on the facts, but not the basic principle which you yourself acknowledge in that decision, namely that there's got to be a unitary business, the linchpin of apportionability.
Speaker: All right, and do you think UDITPA is as far as the Constitution will allow, not a step further?
Walter Hellerstein: We believe that UDITPA reflects the constitutional rule. When you say not a step further, there are... there may be some... there are some constructions of the business income definition that have gone too far, may have gone too far... this Court has struck them down... but certainly not only the definitions, but if you look at the way that the multi-State tax commission that administers the statute that is in force in 30 States, they draw the very same lines. They talk about investments that are part of the business and investments that are not part of the business, long term investments that don't relate to the current operations, allocable businesses--
Speaker: What happens under UDITPA? The domiciliary State can tax all the intangible income, and yet if it fits under UDITPA's formula in another State, that other State can have some apportion.
Walter Hellerstein: --No, Justice O'Connor. Under UDITPA the line is drawn, regardless of whether the income is tangible or intangible, as to whether it is apportionable. So, for example, if it were working capital, we would concede that under the uniform act it quite clearly would be apportionable. That goes into the tax base of all the States in which there's a business. Now take income that clearly is not apportionable under UDITPA. For example, in our judgment an investment in an unrelated metal mining company, 20 percent investment. What happens then? That is then nonbusiness income. It doesn't go in any State's apportionment factor. It simply is... it goes to the commercial domicile under the well-established principle that the State of residence has the power to tax all the resident's or domiciliary's income until... unless and until it collides with some other State's power on a source basis. New Jersey simply has no source-based power to get at this income. It's not that it's in any sense fairer to send to the domicile. There has to be the connection.
Speaker: Is the principle concern with double taxation the taxing authority of the domicile State?
Walter Hellerstein: Justice Kennedy, it could be either. That is, the principle concern is if this Court were to adopt New Jersey's everything is apportionable regime and not indicate the same point, that States could allocate what under their statute is plainly nonbusiness income, then one of those must yield in order to avoid multiple taxation.
Speaker: But it's not... if the State... if the corporation is incorporated in the State of Illinois, is the concern that Illinois will cause the double taxation, or is the concern if we adopt the New Jersey regime, that there will be double taxation in all of the other 49 States, or in some of the other 49 States?
Walter Hellerstein: Well, I think the answer to that, Justice Kennedy, would depend on which State would have to yield, I would assume, looking, for example, at Mobil, where the court saw this problem. Vermont wanted an apportioned share of the income, allegedly New York had the power to tax it all. The court said no, New York can't tax it all. So what would happen if this Court were to adopt New Jersey's regime and would at the same time adhere to the notion that this kind of multiple taxation was inappropriate, it would render all of the domiciliary States' nonbusiness income apportionable. That is, it would say you couldn't allocate this any more. It would say that was no longer the law. I would like to reserve my--
Speaker: Before you sit down, would you just tell me what the third point you were going to make was when you started your argument?
Walter Hellerstein: --Well... thank you, Justice Stevens. I was going to talk about the chaos that I think the adoption of the--
Speaker: I understand.
Walter Hellerstein: --Thank you very much.
Speaker: Thank you, Mr. Hellerstein. Ms. Hamill.
Mary R. Hamill: Mr. Chief Justice, and may it please the Court: We are pleased to be asked back to address the Court's questions. As you know, we argued initially that there was no need to overrule ASARCO and Woolworth, provided that the Court would clarify the statements in ASARCO and Woolworth, that there has to be an operating relationship between the payor and payee of dividend income in order to apportion that income. But if the Court wishes to clear up the confusion and dispel the misconceptions that those opinions have generated, it seems to us that it should overrule the two opinions, and once you get to that point... and it should do so retroactively. But once you get to that point, then the question is, where do you draw the line and how do you apportion, and we see no bright line, no clear line until you go all the way to the corporate entity. And so we say that what is received as income by the corporation, by a nondomiciliary corporation that is doing business in the taxing State, should be apportioned by that State, and the reason we believe that is correct is that when there is a common corporate management, there are inevitably going to be flows of value. There are inevitably going to be mutual interdependence, no matter how disparate these activities seem, the parking lot, the beauty parlor. As Justice Kennedy suggested, there may be borrowing going back and forth. There may be tax losses offsetting one or another. There may be the need for geographical diversification. There may be a William Agee running both of those who sees that there is money to be made in beauty parlors in New Jersey and he can generate capital to go into parking lots in California. The permutations of that are infinite, and to ask the lower courts and the taxing authorities to pull apart these very fine, intricate distinctions is really asking too much, and it is getting into the very area that the Court addressed with the exception to the corn products... the corn products exception to the statutory definition of capital assets where we were talking about business motive. If the motive for acquiring an asset was to further the business, it wasn't a capital asset, and therefore, it generated an ordinary loss on sale, the Court saw that problem and got rid of it in Arkansas Best and severely limited the corn products doctrine. And it really seems to us that we have got to move that--
Speaker: Unitary business concept is just out of the picture I suppose.
Mary R. Hamill: --We think it is not out the window. We think that we are trying to--
Speaker: Well, you can't draw a line where it is in, can you?
Mary R. Hamill: --Why can't you define it at the corporate level? Why can't you say that the unitary ties are brought about by that management, that that is the out-of-State activity that is tying the out-of-State activity to--
Speaker: If you do that, then can the State, where the subsidiary is resident, so to speak, can it tax all 100 percent of the income, even though New Jersey is going to take a share of it too?
Mary R. Hamill: --Justice O'Connor, I want to answer that question by... the way you asked that question makes me wonder about this combined reporting issue again. We don't tax the income of the subsidiary. We tax the dividends--
Speaker: The dividends, right.
Mary R. Hamill: --And so we don't care what happens to that subsidiary, where it is, what it does--
Speaker: But the subsidiary sure does. [Laughter] And so does the parent.
Mary R. Hamill: --We... the fact, the double taxation that would result would be, I think what Mr. Hellerstein was talking about, where you have a UDITPA State that says, this particular kind of income is allocable entirely to the commercial domicile. For instance, take the gain on the sale of real estate located in a UDITPA State; if the UDITPA State said that was nonbusiness income, that is, not related to the business being carried on, it would then say that the entire gain should be allocated to that State.
Speaker: And if it is business income?
Mary R. Hamill: Then it would be apportionable. We meanwhile, under our theory, would say it is all apportionable because it is all, that gain is received by the company that is doing business in New Jersey.
Speaker: Would you win under the UDITPA definition in this case?
Mary R. Hamill: I think so. Not every State would have called this particular gain business income, but under that business income definition, I believe there is a transactional test and a functional test, and we would arguably meet the functional test broadly defined.
Speaker: But I take it from your argument that you would make the submission that UDITPA itself is an unworkable rule?
Mary R. Hamill: I think that follows logically from what we are saying, but what we are trying very hard to do is not to upset the taxing schemes of the majority of the States, not to upset the combined reporting States. We are just--
Speaker: You just want us to overrule ASARCO. [Laughter] What is the constitutional rule that you replace ASARCO with in the UDITPA States? Can the domiciliary State now tax so that you can have two States taxing, or is it only New Jersey, the nondomiciliary States that can apportion? Are you going to have double taxation--
Mary R. Hamill: --No, no--
Speaker: --or is it that the domiciliary State gets frozen out?
Mary R. Hamill: --We say, first off, you have that problem already, because you can have a UDITPA State characterizing something as nonbusiness income and a full apportionment State saying it is business income. But say, if we do admit that what we are advocating will increase it--
Speaker: Because of disagreements of opinion of what kind of an income it is.
Mary R. Hamill: --What is business income, that's right.
Speaker: But I am assuming everybody agrees what kind of income it is.
Mary R. Hamill: All right.
Speaker: Can they both tax it or can only the State, the allocating State tax it?
Mary R. Hamill: I think it depends on what you think the basis for the taxation is. If you think it's that the benefits and protections that are being extended by a State justify the tax, you could very well find that the UDITPA State that is trying to tax it all has a sufficient basis for doing that because the management is there, the income may be... there is a connection with that State. On the other hand--
Speaker: It's your theory. What do you think?
Mary R. Hamill: --On the other hand, I think our... in that situation, we would have a sufficient basis too, and we would be right into the Court's cases, the intangible personal property cases and the personal income tax cases.
Speaker: But I am asking you, under your theory, don't put it on me, you say it depends on what you think the basis is. What do you think the basis is?
Mary R. Hamill: Oh, I think the basis... I think it is the benefits and protections are extended.
Speaker: They can both tax?
Mary R. Hamill: Yes, they can both tax, and I think the Court's cases dealing with intangible property, Curry v. McCanless and the very common scheme under the personal income tax where the State of residence can tax all an individual's income and the State where that individual earns wages or whatever can tax the wages, you have absolute, inevitable double taxation. And the only reason it doesn't happen in practice is that the State of residence grants a credit. But it--
Speaker: Well, we shouldn't encourage it, should we, at least if we follow language in our prior opinions, that isn't a goal to be achieved. It is to be avoided.
Mary R. Hamill: --True, but I think if you are going to promulgate a constitutional rule that says, favors one State over another, you are taking on more than just this case and just the apportionment of income in the context of multi-State businesses and the corporate net income taxes, because you are talking on the intangible personal property tax cases and the personal income tax cases. Ideally, I think you are absolutely right.
Speaker: May I ask a question about, I think it is Justice Kennedy's hypothetical, if we assume a business that has its major operations in California, have a whole bunch of operations there, but none of them on the East Coast and all, and they also separately buy and sell a parking lot in Florida which under traditional rules would not have been considered part of the unitary business. It would be considered a separate transaction. In your view, could Florida tax the entire income from the separate transaction, or must it treat it as part of a unitary business in the same corporate shell?
Mary R. Hamill: No. We think that Florida could treat it--
Speaker: Could have an option to do it either way.
Mary R. Hamill: --Could do it either way because the Constitution sets limits, and if there is nothing constitutionally wrong with what Florida wants to do, it can go ahead and do it. But that doesn't get... then you have the double taxation problem.
Speaker: The only thing that would be constitutionally wrong is it would lead to double taxation which--
Mary R. Hamill: Yes--
Speaker: --would not otherwise occur under our present regime?
Mary R. Hamill: --Well, no, it might very well occur.
Speaker: No, it wouldn't, because I am assuming, my hypothesis is that it is not a unitary business under present rules.
Mary R. Hamill: Oh, all right, then perhaps not. That's correct.
Speaker: See, that would cause a change which would increase the possibility of double taxation.
Mary R. Hamill: Right, yes. But let me talk just a minute about this risk of double taxation. You know, we had 32 corporations filing amicus briefs at this stage of the proceeding, and I don't know if you read our reply brief and looked at the appendix, but 20 of those 32 corporations are domiciled in States that do apportion all income, two-thirds of them, no possibility of double taxation at all. Then again--
Speaker: Yet, yet.
Mary R. Hamill: --No--
Speaker: I mean, those States could change their laws.
Mary R. Hamill: --Oh, sure, they could. But if full apportionment were to be the rule and they are already doing full apportionment, I don't know why... and they are allowed to bring in more, I don't know why they would change. But let me just go on a minute with this risk of double taxation. Then you have to have the UDITPA States say, okay, this is nonbusiness income, but there is a presumption in the multi-State tax commission regulations, I think it is in UDITPA as well, that income is business income, apportionable. Then you have to have a situation where in fact there is double taxation and if you look at the laws of all the States you find that the vast majority of them have very substantial exclusions for dividend income. Dividend income, of course, is the major recurring kind of intangible income. 70 to 100 percent of dividend income is excluded by the vast majority of the States.
Speaker: Of course, if your hypothesis holds, UDITPA also is unworkable and I think that should be stricken down as well.
Mary R. Hamill: Well, I don't think we ought to rewrite UDITPA. There may be movements--
Speaker: Well, you are rewriting the basic formula under the due process clause.
Mary R. Hamill: --No, you aren't, because there would be nothing wrong with a UDITPA State saying, we don't want to apportion. We are happy with trying to make this distinction between property, intangible property that is integrated with the business. We want to do it. We like it that way. Why should the Court or why should we suggest that they not do it? It seems to me it is part of Federalism that they be able to go on and do exactly that. We just say that we don't think it is required by the due process clause and we don't really have the ability to keep on trying to make these distinctions. It is very, very difficult. Let me just turn just a minute to the theoretical basis on which Allied grounds its argument which is that... the source argument, in that a nondomiciliary State can tax only on a source basis, and that there must be a relationship, a direct relationship between the activities generating the income from out-of-State and what's going on in the taxing State. I don't think you find that in the Court's cases, except possibly in ASARCO and Woolworth. I don't think the Court has ever been so explicit, and I don't think that there is any reason why single corporate management couldn't provide that unifying factor that would make it sensible to say that all of the income of a single corporation is unitary income. The property tax cases on which Allied relies... Fargo v. Hart, Adams Express, Pullman's Palace Car... are property tax cases and the difference is that they are valuing tangible property in the State, and you can look at that property. And you could see in Fargo v. Hart that there was $8,000 worth of property, tangible property in the State and the apportionment formula put $800,000 of property in the State. And when it is property that you can see and there is a benchmark, it gets stuck in your craw when you say that the out-of-State values did that much for this tangible property in-State. But income is very different, you can't see it, you can only measure it indirectly. You certainly don't know where it is earned, and so that there is a great deal more flux, a great deal more uncertainty in where income is sourced. The other problem that I think Mr. Hellerstein didn't quite get to, but I know he has 5 minutes, and so I guess I had better... and I don't have any more time, so after I sit down... is the question I think of the chaos. And I think he probably would start with the lack of fair apportionment, that by putting all the income in the base and then going to the apportionment formula you are going to have terrible, terrible misattributions of income. We don't think that is necessarily true. We think that if you make the decision that the intangible is related to the business, it is legitimate to use the three-factor formula, perhaps some modification of the formula to apportion all of that income. It isn't necessarily a misattribution of income. Working capital is apportioned, traditionally, income from working capital, using the three-factor formula. Very often when dividends are determined to be business income, apportioned using the three-factor formula. If too much income is being taxed in a particular State, the taxing authority, the lower courts can deal with that. They can deal with the apportionment formula--
Speaker: How can you say that unitarian concepts are, for the most part, out of the window?
Mary R. Hamill: --Because the formula, I am talking about the three-factor formula, you could for instance decide that you should put intangible property in the denominator of the property factor. That would be the simplest thing to do.
Speaker: You are suggesting that States will not maximize their taxable authority?
Mary R. Hamill: Well, you know, over the past 10 years, the States have really been sort of up against a wall with ASARCO and Woolworth and really losing large amounts of income out of the base. I think if you give the apportionment formula a chance to work, that the States will see that it has got to be used, particularly if all income in the base--
Speaker: They will simply have to be reasonable; even if they weren't, they could get away with taxing more.
Mary R. Hamill: --Well, I don't think the world will ever be the same after ASARCO and Woolworth, and I think the States have learned a lesson. You can't be too piggy. You have really got to realize that in some cases where there is recurring... a huge, huge investment portfolio with none of the, none of the generative assets in the formula may very well create distortion. But the States can and should deal with that. This Court can deal with it--
Speaker: That will be our principle, you can tax whatever you like, but don't be too piggy. [Laughter]
Mary R. Hamill: --I think the Court--
Speaker: That will put the fear of the Lord in them. [Laughter]
Mary R. Hamill: --Again, though, I think that you ought to give the apportionment formula a chance to work and it may very well work, and you may though have a couple of apportionment cases where a State is being piggy and refuses to see the light, refuses to make any--
Speaker: How do we decide then if it is being too piggy without some rules?
Mary R. Hamill: --I think that courts have managed to do it. Judge Cardozo sitting on the New York Court of Appeals had no trouble--
Speaker: We thought that we had managed to do it already.
Mary R. Hamill: --You did, you certainly did. There is no question that ASARCO and Woolworth in one sense, they are a very workable rule, they just plain--
Speaker: Sort of workable I think.
Mary R. Hamill: --They just limit the States... but they limit it in this unreal fashion and truly unreal fashion, as I think Justice Kennedy is pointing out. Nothing to do with the way corporations are--
Speaker: You mentioned Justice Cardozo; he said, life in all its fullness must provide the answer to the riddle. He had not read the three-factor formula. [Laughter] And I am concerned about the three-factor formula because it has a manufacturing bias, which is the very basis for your attack on the unitary system.
Mary R. Hamill: --Right.
Speaker: So it seems to me that we are really destroying the unitary formula, but leaving intact as a protection against overreaching, the apportionment formula which has the same defect.
Mary R. Hamill: Well, if we were a congressional committee, we could fix it all at once, but I think you are absolutely right. I think the apportionment formula is probably as outdated as Fargo v. Hart and Pullman's Palace Car. But we don't have that issue here--
Speaker: One thing at a time, Ms. Hamill.
Mary R. Hamill: --That's right, I am saying one thing at a time, you can't--
Speaker: You are relentless.
Mary R. Hamill: --Bendix has given up. Bendix gave up on the apportionment formula. We argued, in fact, in the tax court of New Jersey, Bendix said, okay, if it's unitary you have to put the factors of ASARCO into the apportionment formula. We said, that is not appropriate because these are minority stock investments and this is not a combined report. But we do think that it ought to be tested by putting the value of the ASARCO stock, the intangible value into the property factor. We already have the receipts in the denominator of the receipts factor, that is, the gain itself, in the denominator, by the way, of course, which lessens what New Jersey can tax. We did the math. The State did the math. We determined that the tax differential was extremely small. Bendix never challenged those figures, never produced any evidence, never did a thing, and the New Jersey tax court ruled that Bendix had not succeeded in establishing any unfairness in the apportionment formula.
Speaker: May I ask you a question about your basic theory, and I want to concentrate on the first point that your opponent made. Assume the hypothetical we talked about earlier with a geographically separate small operation in Florida, and a mammoth business, through 30 other States far out West, but no connection with that separate operation in Florida. You think Florida has the power, because they have a very small operation in Florida that is totally unconnected with the rest of their business, to have access to all of their business records to compute the tax base and the tax should be paid. You don't find there's any jurisdictional problem. Florida provides no benefit whatsoever to 99.44 percent of their business.
Mary R. Hamill: Are you asking whether they have the--
Speaker: Under your approach--
Mary R. Hamill: --the power to get the tax records, or do you mean to include the income?
Speaker: --To include them in income and audit and do everything else, what is the... are you troubled at all by the question of whether Florida in that situation would have the jurisdiction to base their tax collection on an operation so remote from what happened in Florida?
Mary R. Hamill: No, because again I think if these activities are in a single corporation run by single management there are flows of value. And of course, the apportionment formula under your hypothetical is going to take care of problems--
Speaker: I understand, there is nothing unfair--
Mary R. Hamill: --It is a tiny tax.
Speaker: --You could always treat every business as unitary, but in effect, isn't this a brand new concept of taxing power on the part of a State? The mere fact that they have set a foot 6 inches into the State jurisdiction gives that State the power to say, I want to look at everything you have done all over the world-- --And apportion the entire-- --And then apportion the whole thing. That doesn't trouble you at all?
Mary R. Hamill: I think it is a step, it certainly is a step, but I don't think it is totally out of... it is not an enormous step. It is a small step. The Court's cases, I mean, starting with Butler Brothers, which involved the wholesale distribution houses--
Speaker: Right.
Mary R. Hamill: --Geographically separate, the one in California--
Speaker: Yes, but the theory was you couldn't separate it in an accounting sense in order to do it in a meaningful way. I am assuming that all the accounting, and all the rest, is perfectly understandable on a local basis in Florida.
Mary R. Hamill: --Under that hypothetical, under my situation, we would still say you put it in the base, but you are going to have to do an adjustment somehow to the apportionment formula. But of course, we don't agree with your premise, which is that you can separate them--
Speaker: That there can ever be a separate operation within a corporation.
Mary R. Hamill: --totally, totally, separate, that's right.
Speaker: That the Butler case decided that all corporations are totally unitary under all circumstances, no matter how diverse their businesses--
Mary R. Hamill: Well, no--
Speaker: --Anything that is under the same management.
Mary R. Hamill: --Is going to be--
Speaker: Under the same ownership.
Mary R. Hamill: --Well, I think we would say it has to be the same management, I think we maybe misspoke a little bit--
Speaker: Well, in that case, I have a separate manager in my Florida parking lot and then I don't apportion?
Mary R. Hamill: --But you have got a corporate president. You have got a corporate management that is saying, okay, we are going to put it in the parking lot or we are going to put it in the major operations that are in the West.
Speaker: Then the same management is the same as the same ownership because every corporation has a chief executive officer.
Mary R. Hamill: Yes, but I wouldn't want to say just management without putting in the fact that it's being... that there are some people in there calling the shots and making it unitary.
Speaker: What about the parent, the corporation that owns stock in a company that it doesn't really control, but it gets paid dividends? Is that corporation under the same management?
Mary R. Hamill: Well--
Speaker: Say they own 10 percent of a subsidiary... this isn't a subsidiary at all. They just own 10 percent of a company that is very profitable and they have invested some money in it. Certainly, they are not under the same management.
Mary R. Hamill: --No, but the fact that they have bought that stock, that they think that stock is worth having and not selling, that they see... corporations don't invest--
Speaker: So you don't really care about unitary; you just... as you say, any income that a corporation gets from any other corporation is apportionable by--
Mary R. Hamill: --We are saying it is defined differently, and we are trying to keep it, Justice White; we think it does apply in combined reporting situations.
Speaker: --So your same management test really doesn't... except that, it is the same management that runs the rest of the company that decided to invest in this company.
Mary R. Hamill: Yes, that's the Bendix, it is William Agee all over again doing exactly what he did. If I might I would like to turn very briefly to the question of retroactivity. If the Court should overrule ASARCO and Woolworth, we believe it should do so retroactively. We believe that ASARCO and Woolworth were not the kind of clear precedent on which litigants relied under the Chevron Oil test. No prior case had formulated an exclusive test of operating relationships between payor and payee. Corporate purpose had been sanctioned, indeed, in Adams Express Company the Court had said, quote, presumptively, all the property of the corporation is held and used for the purposes of its business, close quote. One year after ASARCO and Woolworth were decided, the Court decided Container, it may have referred to ASARCO, not attacked it head-on, but the reasoning in Container in many, many respects undercuts ASARCO. The recognition that the California code tracks UDITPA and the definition of business and nonbusiness income is a subtle attack on the... and the rejection of the corporate purpose doctrine in ASARCO and Woolworth because that corporate purpose doctrine really does come out of UDITPA. It may have been formulated in a rather generalized way, but it is the UDITPA test. It sanctions, Container sanctions a business purpose for making an investment unitary, and that is footnote 19 that talks about the purpose of making loans to the subsidiaries, again, totally different from ASARCO and Woolworth. Container sanctions reliance on the potential to control; whereas, ASARCO and Woolworth required actual, operating control. Container sanctioned the presumption that companies engaged in similar lines of business are unitary, but Woolworth was engaged in exactly the same line of business as its subsidiaries, and ASARCO's subs were in segments of ASARCO's business. It rejects the bright line test that there must be flows of product, and it puts the burden of proof back on to the taxpayer, and if you read ASARCO it is quite clear that all the gaps, all the deficiencies in the record were construed against the State. So Container undercut ASARCO and Woolworth and after Container no corporate taxpayer had a legitimate reliance interest in ASARCO and Woolworth. And then of course, ASARCO and Woolworth have provoked repeated litigation in the State courts. The lower courts tried to square those rulings with their notions of common sense, tried to follow them and had a very difficult time doing it. We think the prospective application would not further a new rule of law. We have been hurt by the ASARCO/Woolworth rule. We, the State's fisc... the State's sovereign ability to tax, as long as it doesn't violate the Constitution and to promote, to have a new rule and then not let us have the benefit of it retroactively would be very harmful to New Jersey. The equities, for a similar reason favor, we think, retroactive overruling.
Speaker: Ms. Hamill, I have... do you propose that your theory applies only to a corporation in Florida, for example, that is majority owned by the New Jersey corporation that you are taxing?
Mary R. Hamill: No.
Speaker: 10 percent?
Mary R. Hamill: Absolutely, 1 percent, because it is not, you see, this control. It is the way it is used. It is the way the investment is used. To conclude, very briefly, again, I think Allied is trying to paint New Jersey as taking a very radical position. It relies on cases decided a century ago, but we have repeatedly pointed out in this case, this not the way companies operate today. Today they use their investments interchangeably with their manufacturing assets. The days of Pullman's Palace Car, Adams Express Company and Fargo v. Hart are gone forever. There is nothing wrong with the unitary business principle, but it has to be brought into the modern world. The Court will look in vain through everything that Allied has said about how companies invest, how they act, how they really manage these investments, and there is nothing there. What they want is a constitutional formulary that has nothing to do with present-day economic reality. And what we are proposing is a rule that we think is consistent with economic reality, that is clear and predictable, and that is consistent with the due process clause and puts the issue of the division of the tax base where it belongs, which is under the apportionment formula. Thank you.
Speaker: Thank you, Ms. Hamill. Mr. Hellerstein, you have 5 minutes remaining.
Walter Hellerstein: I would like to make three points and given my experience in the first 25 minutes, I had better make my first two fast. Ms. Hamill seems to ignore the commerce clause, that is, ignore the problem, or I guess acknowledge that there simply will be multiple taxation. This is simply a fact of life. Well, it may be a fact of life that New Jersey is willing to live with, but it is certainly a fact of life that the Court has not permitted, that is terribly destructive to the underlying purposes of the commerce clause, namely to prevent multiple taxation. And indeed, her suggestion that because there is an exclusion for dividends, that this is a nonproblem, fails to recognize the fact that in this very case we are dealing with capital gains; fails to recognize the fact that under her regime it is not just intangibles we are talking about, we are talking about all income. Income from sales of tangibles, it doesn't matter, it all goes into the tax base, and therefore there is going to be multiple taxation resulting from the continuing existence of the 30-odd States that have the business/nonbusiness income distinction and States like New Jersey. Second, the 30 years that we have been living with UDITPA in which in fact the States have worked out these relatively workable rules, indeed, Ms. Hamill has conceded, at least for some purposes, that ASARCO and Woolworth are workable. She says they are workable, at least they are workable for the 34 other States that don't want to do what New Jersey does. She wants to leave intact a system in which the preexisting unitary business principle exists for 34 States but not for New Jersey. What will that mean? Think of the kinds of substance versus form problems you would have. For example, if you have a situation, going back to our parking lot, the parking lot is in California. The beauty parlor is in New Jersey. Under her regime, if you put the parking lot into a separate subsidiary, New Jersey cannot tax it. Why? Because there is no unitary connection under traditional principles. Now suppose you take that parking lot, you dissolve it into the beauty parlor corporation. Now miraculously, New Jersey's power to tax expands. The Constitution does not permit this kind of form over substance result. It is simply indefensible. The notion that... with respect to the retroactivity point, that Allied may not have relied on this case is simply irrelevant to the question of whether or not, if this Court should determine that ASARCO and Woolworth should be overruled, whether or not it should be applied retroactively or prospectively. Under the Chevron test it is quite clear, from Justice Souter's opinion in which the Court joined in the judgment that selective prospectivity is unacceptable, and clearly this Court cannot decide this case on a retroactive, prospective basis based on whether or not a particular taxpayer relied. It is obviously whether the taxpayers in general have relied on ASARCO and Woolworth and to suggest that this establishes, that this does not establish a new principle of law and that somehow we were to glean from Container, which actually reaffirmed, spoke favorably of ASARCO and Woolworth, that it was becoming eroded or discredited is simply contrary to common sense. New Jersey also completely fails to appreciate the complexity and chaos that will result from her approach. The problem of having the tax base be congruent to the underlying apportionment factors is serious enough without the complication of sweeping wholly unrelated assets and wholly unrelated businesses into a single apportionable tax base. Under New Jersey's regime, New Jersey would retain the same three-factor formula regardless of the differences of the businesses. You could have, for example, an advertising business and a steel business under the same corporate roof, steel business, capital intensive, all of its property based in the steel mills would outweigh the advertising business, which was generated largely by payroll, say, in New York. The result would be complete misattribution of income without a serious look at what the underlying factors of the apportionment formula provided. This would require the Court to become embroiled in the very controversies that presumably it thought it was getting out of over the last 10 years in developing these workable principles. ASARCO goes back 100 years, and not on a discredited basis. The unitary business principle has been there for 100 years, has involved intangible property. There was no issue in Fargo v. Hart as to the particular tangible property. It was because intangibles were-- Thank you, Mr. Chief Justice.
William H. Rehnquist: Thank you, Mr. Hellerstein. The case is submitted.
Speaker: The honorable court is now adjourned until Monday, the fourth of May at ten o'clock.