Opinion ID: 1951745
Heading Depth: 1
Heading Rank: 3

Heading: Creation and Ownership

Text: The Supreme Court has recently reemphasized its three-part test in determining whether a subsidiary is a part of the unitary business of the parent; those three elements are: (1) functional integration, (2) centralization of management, and (3) economies of scale. Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 783, 112 S.Ct. 2251, 2260, 119 L.Ed.2d 533, 549 (1992). Looking to the period prior to HIMONT's going public, and not to the year of the stock sale, the Comptroller submits the following argument, the relevance of which is questionable: Hercules, as a 50% shareholder, controlled, in concert with Montedison, all aspects of HIMONT. Indeed, HIMONT's by-laws expressly gave Hercules (and Montedison) veto power over such major corporate acts as adoption of budgets, adoption of long-range plans and objectives, disposal of large capital assets, and declaration of dividends. The Supreme Court considered and rejected precisely this sort of argument in F.W. Woolworth Co. v. Taxation & Revenue Dep't, 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819 (1982). In F.W. Woolworth, the parent company owned all of the stock of three of the four foreign subsidiaries at issue, as well as a 52.7% interest in the fourtha far greater level of ownership than that of Hercules in HIMONT in 1987. F.W. Woolworth elected all of the three wholly-owned subsidiaries' directors, and had the authority to operate these companies as integrated divisions of a single unitary business. Id. at 362, 102 S.Ct. at 3134, 73 L.Ed.2d at 826. Moreover, the record demonstrated some managerial links between F.W. Woolworth and its subsidiaries; there were common directors with the parent company and frequent communications between the subsidiaries and the parent. Id. at 368, 102 S.Ct. at 3137, 73 L.Ed.2d at 830. Nevertheless, the Supreme Court reiterated that the proper test under the Constitution was not the potential of unitary control, but rather the actual, in fact unitariness or separateness of the subsidiary enterprises. Id. at 362, 102 S.Ct. at 3134, 73 L.Ed.2d at 826. See also ASARCO, 458 U.S. at 320-22, 102 S.Ct. at 3111-12, 73 L.Ed.2d at 798-99 (no unitary control where the parent owned 51.5% of the stock of the subsidiary and could have controlled the subsidiary's management). Thus, the Supreme Court found little functional integration between F.W. Woolworth's subsidiaries and the parent company. F.W. Woolworth, 458 U.S. at 364, 102 S.Ct. at 3135, 73 L.Ed.2d at 828. The subsidiaries performed their functions `autonomously and independently of the parent company.' Id. at 365, 102 S.Ct. at 3135, 73 L.Ed.2d at 828 (quoting undisputed trial testimony). Thus, there was insufficient functional integration to consider the dividends from the four subsidiaries as part of F.W. Woolworth's unitary business. Id. at 366, 102 S.Ct. at 3136, 73 L.Ed.2d at 829. Similarly, the day-to-day operation of HIMONT was relatively autonomous of Hercules. HIMONT had its own research, sales, marketing, and manufacturing personnel. HIMONT employees who were hired away from Hercules were terminated by Hercules and informed that they would have no bridge back to the parent company. No employee or officer of HIMONT was simultaneously an employee or officer of Hercules. At the time of the sale of HIMONT stock, only three members of HIMONT's nine-person board of directors were appointed by Hercules. The Comptroller also makes reference to the fact that HIMONT was created by agreement between Hercules and Montedison, as opposed to having been acquired on the open market. This is the proverbial distinction which lacks a difference. Maryland may not tax income earned outside its borders, even on a proportional basis, unless there is `a rational relationship between the income attributed to the State and the intrastate values of the enterprise.` Container Corp., 463 U.S. at 166, 103 S.Ct. at 2940, 77 L.Ed.2d at 553 (quoting Exxon Corp. v. Wisconsin Dep't of Revenue, 447 U.S. 207, 219-20, 100 S.Ct. 2109, 2118, 65 L.Ed.2d 66, 79 (1980), in turn quoting Mobil Oil Corp., 445 U.S. at 437, 100 S.Ct. at 1231, 63 L.Ed.2d at 520). The manner by which HIMONT was created in no way illuminates the Hercules-HIMONT relationship four years later. The principal basis of decision by the Tax Court viewed the entire purpose of HIMONT's existence to be extricating Hercules from the PPL manufacturing business, and that, as such, the sale of stock should be considered an operational part of Hercules's business. [3] This Tax Court analysis, approved by the Court of Special Appeals, would stretch functional integration beyond the constitutional bounds established by the Supreme Court which, in analogous cases, has not encompassed strategic, long-range decisions of a company within operational functions. In ASARCO, the Supreme Court flatly rejected the argument that corporate purpose should define unitary business. ASARCO, 458 U.S. at 326, 102 S.Ct. at 3114, 73 L.Ed.2d at 801. In that case, Idaho contended that the dividends paid on stock held by ASARCO in partial subsidiaries should be considered a part of that company's unitary business if the investments were `acquired, managed or disposed of for purposes relating or contributing to the taxpayer's business.' Id. (quoting Idaho's brief) (emphasis added). The Supreme Court rejected this argument, stating that such a broad definition of unitary business would destroy the concept. Id. Guidance on the constitutional issue is also found in Allied-Signal, 504 U.S. 768, 112 S.Ct. 2251, 119 L.Ed.2d 533. The case concerned New Jersey's attempt to tax an apportioned part of the gain realized by Bendix on its sale of 20.6% of the stock of ASARCO Inc. that Bendix had purchased on the open market over a period of two years. Bendix had four major operating groups: automotive, aerospace/electronics, industrial/energy, and forest products. ASARCO was a world leader in producing nonferrous metals. The Court recognized that the payee and the payor need not be engaged in the same unitary business as a prerequisite to apportionment in all cases. Id. at 787, 112 S.Ct. at 2263, 119 L.Ed.2d at 552. What is required instead is that the capital transaction serve an operational rather than an investment function. Id. New Jersey argued that Bendix's sale of the ASARCO stock served an operational function because Bendix intended to use the proceeds from the sale to acquire another aerospace company, Martin Marietta. Id. at 789, 112 S.Ct. at 2264, 119 L.Ed.2d at 553. The Supreme Court rejected this argument, pointing out that it reveal[ed] little about whether ASARCO was run as part of Bendix's unitary business. Id. Of course, when Bendix sought to acquire Martin Marietta, it also withdrew its investment in a partial subsidiary engaged in the smelting and refining business. Seemingly the strategic decision to discontinue an investment in one area of activity in order to concentrate resources elsewhere is no more an operating function in the case before us than was the strategic decision in Allied-Signal. To illustrate further why Bendix's investment in ASARCO was not an operating function, the Court in Allied-Signal stated that the ASARCO stock was not a short-term investment of working capital analogous to a bank account or certificate of deposit. Id. at 789-90, 112 S.Ct. at 2264, 119 L.Ed.2d at 553-54. Similarly, in the decision on the sale by Hercules of its stock in HIMONT, the Supreme Court of Minnesota rejected the argument that the sale served an operational function for Hercules by pointing out that Hercules had not treated its investment in Himont as a repository for working capital like a bank account or certificate of deposit. Hercules, 575 N.W.2d at 117. The Supreme Court has made clear beyond any doubt that the proper level of inquiry under the Constitution depends upon the actual connection between the subsidiary investment and its parent. How the parent intends to use the income derived from its investments is irrelevant. Income, from whatever source, always is a `business advantage' to a corporation. Our cases demand more. In particular, they specify that the proper inquiry looks to `the underlying unity or diversity of business enterprise....' F.W. Woolworth, 458 U.S. at 363, 102 S.Ct. at 3135, 73 L.Ed.2d at 827 (quoting Mobil Oil Corp., 445 U.S. at 440, 100 S.Ct. at 1233, 63 L.Ed.2d at 523). This underlying unity is not present between Hercules and HIMONT.