Document: 528 U.S. 458120 S.Ct. 1022145 L.Ed.2d 974 SyllabusNOTE: Where it is feasible, a syllabus (headnote) will be released, as being done in connection with this case, at the time opinion issued. The constitutes no part of Court but has been prepared by Reporter Decisions for convenience reader. See United States v. Detroit Timber & Lumber Co., 200 321, 337. SUPREME COURT OF THE UNITED STATES HUNT-WESSON, INC.v.FRANCHISE TAX BOARD CALIFORNIA CERTIORARI TO APPEAL CALIFORNIA,FIRST APPELLATE DISTRICT No. 98 2043. Argued January 12, 2000.Decided February 22, 2000. A State may tax proportionate share "unitary" income nondomiciliary corporation that carries out particular business both inside and outside State, Allied-Signal, Inc. Director, Div. Taxation, 504 768, 772, not "nonunitary" received from an "unrelated activity" which "discrete enterprise," e.g., id., 773. California's "unitary business" income-calculation system determining State's taxable multistate corporation's authorizes deduction interest expense, permits (with one adjustment) use only to extent amount exceeds certain out-of-state arising unrelated activity discrete enterprise, i.e., nonunitary could otherwise under Court's decisions. Petitioner Hunt-Wesson, Inc., successor California incurred expense during years issue. disallowed insofar had relevant dividend income. Hunt-Wesson challenged disallowance's constitutional validity. Appeal found constitutional, Supreme denied review. Held: Because offset provision reasonable allocation deductions generates, impermissible taxation jurisdictional reach violation Federal Constitution's Due Process Commerce Clauses. interstate activities even on proportional basis unless there "minimal connection" or "nexus" between such taxing "rational relationship attributed intrastate values enterprise." Container Corp. America Franchise Tax Bd., 463 159, 165 166. Although statute does directly impose income, measures additional unitary becomes subject its (through reducing deduction) precisely taxpayer received. Thus, calls limitation would seem, fact, tax. National Life Ins. Co. States, 277 508. If show limit actually reflected portion properly related however, not, merely proper deduction. Denman Slayton, 282 514. state statute, pushes concept past bounds. In effect, assumes borrows any money all really borrowed "purchase carry," cf. 26 U.S.C. § 265(a)(2), investments (as long investments), if put into year. No other jurisdiction taken so absolute approach. Rules used Government many utilize ratio assets gross allocate total domestic foreign source recognize borrowing, supposedly undertaken business, also support generation. However, unlike rule, ratio-based rules do assume borrowing first supports investment. Rather, they each two types Over time, expect ratios reflect approximately firms have devoted generating type Conversely, simply rule attributes investment accurately Pp. 5 9. Reversed remanded. Opinion 1 NOTICE: This formal revision before publication preliminary print Reports. Readers are requested notify Decisions, Washington, D. C. 20543, typographical errors, order corrections made goes press. 2 STATES. 3 4 INC., PETITIONERv.FRANCHISE ON WRIT OFCALIFORNIA, FIRST 2000 6 Justice Breyer delivered Court. 7 State. 772 (1992). " ' Id., 773 (quoting Exxon Department Revenue Wis., 447 207, 224 (1980), turn quoting Mobil Oil Commissioner Taxes Vt., 445 425, 442, 439 (1980)). authorize expense. But permit We must decide whether those violate conclude do. 8 * legal issue less complicated than appear, examples help show. California, like uses what called determines nationwide business. During issue, then averaged three firm's property, payroll, sales make combined ratio. Cal. Rev. Code Ann. §§25128, 25129, 25132, 25134 (West 1979). Finally, multiplies result "California's share," applies corporate If, example, Illinois tin can manufacturer, doing elsewhere, earns $10 million sales, formula manufacturer 10% upon $1 million. 9 taxes percentage constitutionally limited Unitary normally includes activities, excludes "derive[s] U.S., (internal quotation marks omitted). As we said, latter except domicile (and states enterprise" business). Ibid. 10 Any net taxed. system, others, basically asking add up deduct costs. One costs statutory language here contains important limitation. It says "interest deductible" shall . formula," dividends §24344 1979) (emphasis added); Appendix, infra. Suppose $150,000; suppose receives $100,000 New Zealand sheep-farming subsidiary. deduction, $150,000, $50,000, allowed "exceeds" 11 Other makes matter little more complex. clear that, irrespective against earns. §24344. means earned interest, say paid receipt bank accounts, (though still lose remaining $50,000 because sheep farm). Another provides exception subsidiary paying California. §§24344, 24402. farm were (or least California), need consider either these complications here. 12 final complication involves dispute parties over covers. claims (at here) required corporations determine their was other, matters. side, agrees form provided did work way, interpret correctly. view, takes account. Apparently now believes another (say, buy shares farm), count if, non-unitary matter, arguably irrelevant question (Hunt-Wesson reported expense), our result. Therefore, further. 13 us reasonably straightforward: Does Constitution carve received? Petitioner, corporation. That validity disallowance. A079969 (Dec. 11, 1998), App. 54; see Pacific Tel. 3d 544, 498 P.2d 1030 (1972) (upholding statute), review, 67. granted certiorari question. II 14 Relevant precedent violates Clauses Constitution. 159 (1983), wrote "Due allow "a rational 166 Corp., 219 220, 436, 437). Cf. International Harvester Treasury, 322 340, 353 (1944) (Rutledge, J., concurring dissenting part) ("If want due process sustain" tax, "by fact alone burden imposes commerce among 'undue' "). concede falls within scope phrase "not allocable formula" itself bears relationship" Under precedent, taxed domicile, some 15 denies (income manufacture example), bear But, once 'tax sleeping measured number pairs shoes you your closet shoes.' Trinova Michigan Dept. 358, 374 (1991) Jenkins, Taxation Interstate Commerce, 27 Tenn. L. 239, 242 (1960)). And reason, 508 (1928) (finding federal reduced insurance company's reserves tax-exempt company holding "tax-free" municipal bonds constituted unlawful income). 16 principle end matter. offers justification seeks relate collection 514 (1931) code's denial where carry" obligations). 17 points fungible, consequently often difficult "really" purpose prevents firm claiming build plant) when second Without might borrow hilt (more highly taxed) needs, freed resources purchase (less assets. "tax arbitrage" problem, argues, why upheld precursor "incurred continued obligations securities. supra, 519. consistently denials represent efforts though mean owes he without denial. E.g., First Nat. Bank Atlanta Bartow County Bd. Assessors, 470 583 (1985). 18 Presumably have, sold proceeds operation instead borrowing. 19 At very least, last assumption unrealistic. lack practical realism helps explain too far. code unrealistically every contrary view business) theoretical possibility hypothetical sale fails "actually sense how generated," 169, assesses protected claims, obviously sheep-farm-related while attributing tin-can-related well. jurisdiction, state, approach thetax arbitrage problem presents. 20 law comparable circumstances (allocating income) CFR §§1.861 9T(f), (g) (1999). similar, much limited, set circumstances, kind modified tracing requiring allocated situations group's loans subsidiaries increased relative recent (subject adjustments), exceed amounts §1.861 10. Some follow See, Mun. Regs., tit. 9, §123.4 (1998); Ga. Regs. §560 7.03(3) formulas generation Ala. §40 35(a)(2) La. Reg. §1130(B)(1) (1988). combination approaches. N. M. Admin. Code, Tit. 3, §5.5.8 (1999); Utah §59 101 (19) California's. 21 Ratio-based argues) specific actions given year, period 22 reach. therefore 23 determination Appeals reversed, case remanded proceedings inconsistent opinion. 24 ordered. APPENDIX OPINION 25 Interest; restrictions "(a) Except subsection (b), accrued year indebtedness taxpayer. (b) [T]he deductible equal formula, plus amount, any, balance (except provisions Section 24402) formula. Interest included preceding sentence 28 §24402. Dividends 29 "Dividends declared measure imposed Chapter declaring dividends."

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