Summary
In Allied-Signal, the court upheld a New York City tax against a nonresident corporation, Allied-Signal/Bendix, based upon its investment in an unaffiliated corporation that was doing business in New York, ASARCO, who subsequently distributed dividend income to Allied-Signal/Bendix, outside of New York City.
Summary of this case from Bridges v. Autozone Properties, Inc.Opinion
Argued September 4, 1991
Decided December 23, 1991
Appeal from the Appellate Division of the Supreme Court in the First Judicial Department, Jeffrey M. Atlas, J.
Walter Hellerstein, Arthur R. Rosen and Paul H. Frankel for appellant.
Victor A. Kovner, Corporation Counsel (Anshel David, Edith I. Spivack and Edward F.X. Hart of counsel), for respondent. Robert Abrams, Attorney-General (Frederic L. Lieberman and August L. Fietkau of counsel), for New York State Department of Taxation and Finance, amicus curiae.
In this appeal we are called upon to determine whether New York City may constitutionally tax any portion of the dividend and capital gain income that a nondomiciliary corporation receives by reason of its investment in another corporation conducting business within the City in the absence of a unitary business relationship between the two corporations. For the reasons that follow, we conclude that the City may do so without offending either the Due Process Clause (US Const 14th Amend) or the Commerce Clause (US Const, art I, § 8) of the Federal Constitution.
See, Woolworth Co. v Taxation Revenue Dept. ( 458 U.S. 354); ASARCO Inc. v Idaho State Tax Commn. ( 458 U.S. 307); Mobil Oil Corp. v Commissioner of Taxes ( 445 U.S. 425); see also, Container Corp. v Franchise Tax Bd. ( 463 U.S. 159); Exxon Corp. v Wisconsin Dept. of Revenue ( 447 U.S. 207).
I. THE CITY'S TAXATION SCHEME
New York City imposes a general corporation tax, based upon net income, on domestic and nondomiciliary corporations "[f]or the privilege of doing business, or of employing capital, or of owning or leasing property in the city in a corporate or organized capacity, or of maintaining an office in the city" (Administrative Code of City of New York § 11-603 [1]). Consistent with this purpose, the City has adopted rules for allocating corporate income, depending upon the connection between the income and the City. Although income derived from a taxpayer's business operations (business income) and income derived from a taxpayer's investments (investment income) are taxed at the same rate, each is allocated to the City by a different method.
The portion of a corporate taxpayer's business income allocable to the City is determined by multiplying the taxpayer's total business income by its "business allocation percentage" (BAP). The BAP represents the arithmetic average of the ratios of the taxpayer's receipts, payroll and property values within the City to those of the corporation as a whole (see, Administrative Code § 11-604 [3] [a]). For example, if 20% of a taxpayer's total receipts, payroll and property are connected with the City, its BAP will be 20%, and it will be taxed by the City on 20% of its total business income.
If New York City is the corporate taxpayer's only regular place of business, then its BAP is 100% (Administrative Code of City of New York § 11-604 [3] [a] [4]).
A corporate taxpayer's investment income, in contrast, is allocated to the City by multiplying the taxpayer's total investment income by its "investment allocation percentage" (IAP). Unlike the taxpayer's BAP — which reflects the taxpayer's own activities in the City, the taxpayer's IAP reflects the degree of New York City presence of the issuers of the securities in which the taxpayer has invested (i.e., the corporations which have generated the taxpayer's investment income).
New York State has adopted similar rules for allocating corporate investment income (see, Tax Law § 210 [3] [b]).
The taxpayer's IAP is determined by first multiplying the amount of each of the taxpayer's investments by the percentage of the issuer's entire capital allocated to the City on the issuer's own New York City return, if any, for the preceding year (see, Administrative Code § 11-604 [3] [b]). The amounts thus determined are then added together and divided by the taxpayer's total investments, yielding the taxpayer's IAP (see, id.). The taxpayer's total investment income is then multiplied by its IAP to determine the amount of that income which is subject to taxation by the City.
The determination of a taxpayer's IAP may be illustrated as follows: Assume that a taxpayer has invested in corporations "A", "B" and "C". Also assume that the taxpayer's investment in "A" is valued at $200,000, its investment in "B" at $300,000, and its investment in "C" at $600,000; and that "A's" New York City issuer's allocation percentage is 40%, "B's" is 15%, and "C's" is 10%. The sum of each of the taxpayer's investments multiplied by the respective issuer's allocation percentage is $185,000 ([$200,000 X 40%] + [$300,000 X 15%] + [$600,000 X 10%]). That amount ($185,000) is then divided by the sum of the taxpayer's total investments ($1,100,000), yielding the taxpayer's IAP (16.8%).
II. FACTS AND PROCEDURAL HISTORY
In the late 1970's, The Bendix Corporation (Bendix) — a Delaware manufacturing corporation headquartered in Southfield, Michigan — acquired approximately 20.6% of the outstanding common stock of ASARCO Inc. (ASARCO) — a New Jersey mining and refining corporation with its commercial domicile in New York City. Bendix planned, effectuated and managed this investment from its Michigan offices. At all relevant times, Bendix's activities in New York City were limited to those conducted by its International Group — one of its divisions — whose sole function was the development of business abroad.
During its 1981 fiscal year, Bendix received $2,795,137 in dividends at its Michigan headquarters from its ASARCO investment. Prior to the end of that same fiscal year, Bendix, again acting through its Michigan offices, sold its ASARCO stock, realizing a capital gain of $211,513,354. Bendix, however, did not include any of this dividend and capital gain income in its tax base on its New York City general corporate tax return for the 1981 fiscal year.
Following an audit, the New York City Department of Finance restored the excluded income to Bendix's tax base as apportionable investment income, and issued a notice of determination of a deficiency in the amount of $244,281, which was subsequently reduced to $96,540. Bendix thereafter petitioned the department for a redetermination. Relying on Woolworth Co. v Taxation Revenue Dept. ( 458 U.S. 354) and ASARCO Inc. v Idaho State Tax Commn. ( 458 U.S. 307), Bendix contended that New York City could not constitutionally tax any of the dividend and capital gain income that it — as a nondomiciliary of the City — derived from its investment in another corporation in the absence of a unitary business relationship between the two corporations. The Department, however, disagreed, and upheld the deficiency, reasoning that the absence of a unitary business relationship was not determinative when the investment income sought to be taxed was allocated to the taxing jurisdiction on the basis of the presence in that jurisdiction of the corporation which generated that income, rather than the presence of the taxpayer itself.
In computing the deficiency, the department had used an investment allocation percentage (IAP) of 1.4747% to determine the portion of Bendix's investment income allocable to New York City. The department subsequently conceded that the correct IAP was .6639%, which, when certain prepayments were taken into account, reduced the deficiency as indicated above.
The parties have stipulated that Bendix and ASARCO were at no relevant time engaged in a unitary business relationship (see, Container Corp. v Franchise Tax Bd., 463 U.S. 159; Woolworth Co. v Taxation Revenue Dept., 458 U.S. 354; ASARCO Inc. v Idaho State Tax Commn., 458 U.S. 307; Exxon Corp. v Wisconsin Dept. of Revenue, 447 U.S. 207; Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425).
Petitioner Allied-Signal Inc. — Bendix's successor-in-interest — thereafter commenced this CPLR article 78 proceeding seeking to annul the determination of the Department of Finance. Supreme Court, New York County, denied the petition ( 146 Misc.2d 632), and on appeal, the Appellate Division, First Department, affirmed ( 167 A.D.2d 327). Both courts, relying in part on Harvester Co. v Department of Taxation ( 322 U.S. 435), concluded that the absence of a unitary business relationship between Bendix and ASARCO was not dispositive, since the dividend and capital gain income that the City was seeking to tax had its source within the City. Petitioner thereafter appealed as of right to this Court (CPLR 5601 [b] [1]). We now affirm.
III. ANALYSIS
When a State or municipality seeks to impose an income-based tax upon a multijurisdictional corporation the strictures of the Due Process and Commerce Clauses compel it to confine its taxing powers to income fairly attributable to activities carried on within its borders (see, Container Corp. v Franchise Tax Bd., 463 U.S. 159, 164; Woolworth Co. v Taxation Revenue Dept., supra, at 363; ASARCO Inc. v Idaho State Tax Commn., supra, at 315; Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425, 436-437). A taxpayer who contends that a taxing jurisdiction has transgressed this fundamental limitation bears "the '"distinct burden of showing by 'clear and cogent evidence' that [the challenged tax] result[ed] in extra-territorial values being taxed"'" (Container Corp. v Franchise Tax Bd., supra, at 164, quoting Exxon Corp. v Wisconsin Dept. of Revenue, 447 U.S. 207, 221, in turn quoting Butler Bros. v McColgan, 315 U.S. 501, 507, in turn quoting Norfolk W. Ry. Co. v North Carolina, 297 U.S. 682, 688). Petitioner contends that it has met this heavy burden here. Specifically, it maintains that New York City, by attempting to tax the dividend and capital gain income that Bendix — a nondomiciliary of the City — derived from its investment in ASARCO, has exerted its taxing powers over income not properly taxable by the City. It bases this contention on two separate — albeit interrelated — arguments. First, it asserts that the City may not tax the income that a nondomiciliary corporation derives from its investment in another corporation — even when the latter corporation itself does business within the City — in the absence of a unitary business relationship between the two corporations. Second, it contends that even if such a relationship is not essential, the tax imposed here by the City nevertheless cannot withstand constitutional scrutiny, since it did not fairly reflect the taxpayer's own presence and activities in the taxing jurisdiction. We address each of these arguments in turn.
Petitioner's contention that the weighted averaging formula used by New York City for allocating investment income (see, supra, at 76-77) is unconstitutional since it may potentially result in the taxation of investment income having no connection with the City was not raised below, and thus is not preserved for our review.
A
The Due Process and Commerce Clauses of the Federal Constitution prevent a State or municipality from taxing the income that a nondomiciliary corporation earns unless there is some "minimal connection" or "nexus" between that income and the taxing jurisdiction (see, Container Corp. v Franchise Tax Bd., supra, at 165-166; Exxon Corp. v Wisconsin Dept. of Revenue, supra, at 219-220). Petitioner contends that the lack of a unitary business relationship between Bendix and ASARCO necessarily negates any possibility of a sufficient nexus existing in this case. In support of this argument, it points to three Supreme Court decisions, Woolworth Co. (supra), ASARCO Inc. (supra) and Mobil Oil Corp. (supra), where the Court observed that the "linchpin of apportionability" in the field of State income taxation is the "unitary-business principle" (Woolworth Co. v Taxation Revenue Dept., 458 US, at 362, supra; ASARCO Inc. v Idaho State Tax Commn., 458 US, at 317, supra; Mobil Oil Corp. v Commissioner of Taxes, 445 US, at 439, supra). We, however, are not persuaded that these cases can be read as broadly as petitioner contends.Woolworth, ASARCO and Mobil, each involved a State's attempt to tax the dividend or capital gain income that a nondomiciliary corporation doing business within its borders derived from its investment in another corporation which itself had no connection with the taxing jurisdiction. The State in each case relied solely on the corporate taxpayer's own presence within its borders as providing the State with a sufficient nexus with the "foreign-source" income that it sought to tax. The Supreme Court in each instance concluded that such a connection — standing alone — would be insufficient to support the exertion of the State's taxing powers unless there was a unitary business relationship — an integral tie — between the corporate taxpayer and the corporation which generated the investment income in question. Nowhere did the Court indicate that it intended that the existence of a unitary business relationship would be the exclusive means for satisfying the nexus requirement when a State or municipality sought to tax the investment income that a nondomiciliary corporation earned. Thus, contrary to the views expressed in Judge Hancock's dissent, neither Woolworth, ASARCO nor Mobil, can be said to have decided the question presented here — namely, whether the business activities conducted in New York City by ASARCO — the corporation which generated Bendix's investment income — may provide the requisite nexus for the City's imposition of a tax on a portion of that income. We agree with the City that precedent requires that this question be answered in the affirmative.
In Woolworth, ASARCO and Mobil, the Supreme Court narrowly framed the issue before it in terms of whether a State could tax a portion of the dividend or capital gain income that a nondomiciliary corporation received by reason of its investment in another corporation that did no business within the taxing jurisdiction (see, Woolworth Co. v Taxation Revenue Dept., supra, at 356 ["The question is whether the Due Process Clause permits New Mexico to tax a portion of dividends that appellant F.W. Woolworth Co. received from foreign subsidiaries that do no business in New Mexico" (emphasis supplied)]; ASARCO Inc. v Idaho State Tax Commn., supra, at 308-309 ["The question is whether the State of Idaho constitutionally may include within the taxable income of a nondomiciliary parent corporation doing some business in Idaho a portion of intangible income — such as dividend and interest payments, as well as capital gains from the sale of stock — that the parent receives from subsidiary corporations having no other connection with the State" (emphasis supplied)]; Mobil Oil Corp. v Commissioner of Taxes, supra, at 442 [The question is whether Mobil's " foreign-source dividends * * * [are] exempt, as a matter of due process, from apportionment for state income taxation by the State of Vermont" (emphasis supplied)]).
Judge Bellacosa, in dissent, concludes that Bendix's own activities within New York City supplied a sufficient constitutional nexus for the City's taxation of the dividend and capital gain income that Bendix derived from its ASARCO investment. Inasmuch as the parties have stipulated that a unitary business relationship did not exist between Bendix and ASARCO, it is difficult to reconcile such a conclusion with Woolworth Co. (supra), ASARCO Inc. (supra) and Mobil Oil Corp. (supra). Each of those decisions, as noted above, clearly held that the mere presence in the taxing jurisdiction of a nondomiciliary corporate taxpayer is insufficient to support that jurisdiction's taxation of the dividend and capital gain income that the corporate taxpayer derives from its investments in other corporations.
Judge Hancock posits that two recent decisions handed down by the New Jersey and Virginia Supreme Courts (Bendix Corp. v Director, Div. of Taxation, 125 N.J. 20, 592 A.2d 536, cert granted sub nom. Allied-Signal, Inc. v Director, Div. of Taxation, ___ US ___, 112 S Ct 632 [Nov. 27, 1991]; Corning Glass Works v Virginia Dept. of Taxation, 241 Va. 353, 402 S.E.2d 35, cert denied ___ US ___, 112 S Ct 277) support petitioner's contention that ASARCO's presence and activities in New York City do not provide the requisite nexus for the City's taxation of a portion of the dividend and capital gain income that Bendix derived from its investment in that corporation. Inasmuch as neither the New Jersey nor the Virginia case involved a taxing scheme that — like the City's — allocates investment income to the taxing jurisdiction on the basis of the presence in that jurisdiction of the corporation which generated the income in question, neither of those decisions can be said to have addressed the issue raised here.
In determining whether a sufficient nexus exists between a taxing jurisdiction and the income it seeks to tax, the Supreme Court has emphasized that the inquiry should focus upon whether "the taxing power exerted * * * bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return" (Wisconsin v Penney Co., 311 U.S. 435, 444; see, Norfolk W. Ry. Co. v Tax Commn., 390 U.S. 317, 325, n 5). Here, it is undisputed that New York City has afforded privileges and opportunities to ASARCO. That these privileges and opportunities have contributed to ASARCO's capital appreciation and thus also inured to the benefit of all its shareholders, including Bendix, is also beyond question. Thus, we agree with the City that it has given Bendix something "for which it can ask return," and that consequently a sufficient nexus existed to support the City's tax.
See, Harvester Co. v Department of Taxation ( 322 U.S. 435, 442 ["(A state) may constitutionally tax the (state) earnings distributed as dividends to the stockholders. It has afforded protection and benefits to (the corporation's) activities and transactions within the state. These activities have given rise to the dividend income of (the corporation's) stockholders and this income fairly measures the benefits they (i.e., the stockholders) have derived from these (state) activities" (emphasis supplied)]).
Judge Bellacosa, in concluding that the challenged tax is unconstitutional, ascribes some significance to the fact that the City has labeled the tax "a business privilege tax" and not an income tax (see, Bellacosa, J., dissenting opn, at 91). Such a focus, however, is misplaced. As the Supreme Court has explained: "There is no economic consequence that follows necessarily from the use of the particular words, 'privilege of doing business,' and a focus on that formalism merely obscures the question whether the tax produces a forbidden effect" (Complete Auto Tr. v Brady, 430 U.S. 274, 288).
Indeed, it would be difficult to reconcile a contrary conclusion with the Supreme Court's decision in Harvester Co. v Department of Taxation ( 322 U.S. 435, supra). There, the Court upheld the Wisconsin Privilege Dividend Tax which — in its practical operation — worked very similarly to the tax at issue here. Both were imposed on nondomiciliary shareholders based on the presence in the taxing jurisdiction of the corporation which generated the investment income sought to be taxed. Significantly, in upholding the Wisconsin tax against constitutional challenge, the Supreme Court expressly rejected the notion that the taxing power exerted by a State had to be premised on the taxpayer's own activities within the State:
The Supreme Court, in an earlier decision — Wisconsin v Penney Co. ( 311 U.S. 435) — had upheld the same tax on the basis that its "practical operation" was merely "to impose an additional tax on corporate earnings within Wisconsin but to postpone the liability for this tax until such earnings [were] paid out in dividends" (id., at 442). Wisconsin's highest court, however, subsequently construed the statute in question as imposing a tax on the shareholder, and not the corporation. Accordingly, the Supreme Court, when again confronted with the issue of the tax's constitutionality in the Harvester case, "assume[d] that the [tax] statute, by directing deduction of the tax from declared dividends, distribute[d] the tax burden among the stockholders differently than if the corporation had merely paid the tax from its treasury and that the tax [was] thus, in point of substance, laid upon and paid by the stockholders" ( 322 US, at 440).
The Supreme Court has made it clear that it is the practical operation of a tax — not its label — which governs its constitutionality (see, Complete Auto Tr. v Brady, 430 U.S. 274, 280 ["the tax should be judged by its economic effects rather than by its formal phrasing"]).
Despite Judge Hancock's assertions to the contrary, the fact that the corporation was responsible for withholding and turning over the tax to the State did not alter the fact that the tax was "in point of substance, laid upon and paid by the stockholders" (see, Harvester Co. v Department of Taxation, 322 U.S. 435, 440; see also, Wisconsin Gas Co. v United States, 322 U.S. 526, 528-530 ["Doubtless all taxes on corporate earnings are, to a greater or lesser extent, translated into economic burdens upon the shareholder. [But] not all such taxes can be said, for that reason, to be 'imposed' upon the shareholder. * * * However, here the burden is placed upon him, not derivatively as through an income tax upon the corporation, but directly and exclusively. * * * That [the State] has made the corporation its tax collector by requiring it to withhold payment of a portion of the dividends and to turn that portion over to the State does not make the tax one 'imposed' upon the corporation * * *. The fact is that the tax is extracted from fixed dividends owed to the stockholder, not merely from his common interest in corporate earnings. * * * [T]he impact of the tax is focused narrowly and falls independently upon each recipient of the dividend without affecting the tax burden of the corporation or other shareholders. The operation thus disclosed for the tax amply sustains the emphatic declaration of the [State] Supreme Court that it is imposed upon the shareholder, not upon the corporation" (emphasis supplied)]).
"[A state] may impose the burden of the tax * * * upon the stockholders who derive the ultimate benefit from the corporation's [state] activities. Personal presence within the state of the stockholder-taxpayers is not essential to the constitutional levy of a tax taken out of so much of the corporation's [state] earnings as is distributed to them. A state may tax such part of the income of a non-resident as is fairly attributable either to property located in the state or to events or transactions which, occurring there, are * * * within the protection of the state and entitled to the numerous other benefits which it confers. * * * And the privilege of receiving dividends derived from corporate activities within the state can have no greater immunity than the privilege of receiving any other income from sources located there" (id., at 441-442 [emphasis supplied]; see also, Shaffer v Carter, 252 U.S. 37).
B
Having concluded that a sufficient nexus existed to support the imposition of the City's tax, we now turn to petitioner's alternative — albeit closely related — argument that the tax imposed here was nevertheless unconstitutional since it did not fairly reflect Bendix's (i.e., the taxpayer's) own presence and activities in the taxing jurisdiction. Specifically, petitioner contends that, inasmuch as Bendix planned, effectuated and managed its ASARCO investment solely from its Michigan headquarters, none of the income it derived from that investment can be said to be related — fairly or otherwise — to its (i.e., Bendix's) activities in the City. Accordingly, petitioner maintains that the tax imposed here must be deemed to have been "out of all appropriate proportion to the business transacted * * * in [the City]" (citing Rees' Sons v North Carolina, 283 U.S. 123, 135), and to have "led to a grossly distorted result" (citing Norfolk W. Ry. Co. v Tax Commn., 390 U.S. 317, 326).The obvious fallacy in petitioner's argument is that the premise upon which it is based — that the tax imposed here had to be fairly related to Bendix's (i.e., the taxpayer's) own activities within the City — simply has no basis in either logic or precedent. If a tax is properly premised on the presence in the taxing jurisdiction of an entity other than the taxpayer (as we have concluded that the tax at issue here was), common sense would seem to dictate that the tax must be fairly related to that entity's activities within the taxing jurisdiction — not the taxpayer's. Indeed, the Supreme Court has indicated that such a focus is constitutionally required (Trinova Corp. v Michigan Dept. of Treasury, 498 US ___, ___, 111 S Ct 818, 832 [the tax imposed "'must actually reflect a reasonable sense of how [the] income is generated'"], quoting Container Corp. v Franchise Tax Bd., 463 US, at 169, supra; see also, Goldberg v Sweet, 488 U.S. 252, 262 [the tax imposed must "reasonably reflect the in-state component of the activity being taxed"]; Woolworth Co. v Taxation Revenue Dept., 458 US, at 363, supra ["'the income attributed to [a] State for tax purposes must be rationally related to "values connected with the taxing State"'"]). Inasmuch as petitioner has not demonstrated that the City's tax on the dividend and capital gain income that Bendix derived from its ASARCO investment bore anything but an inherently rational relationship to the manner in which that income was generated, we decline to hold it unconstitutional on that basis (see, Harvester Co. v Department of Taxation, 322 US, at 442, supra [noting that the in-State activities of the corporation which generated the investment income sought to be taxed "fairly measure(d) the benefits that (the taxpayer-shareholders) derived from these (in-State) activities"]).
IV. CONCLUSION
In sum, we conclude that petitioner has failed to meet its "'distinct burden of showing by "clear and cogent evidence" that [the City's tax] result[ed] in extraterritorial values being taxed'" (Container Corp. v Franchise Tax Bd., 463 US, at 175, supra). Accordingly, the order of the Appellate Division should be affirmed, with costs.
Judges SIMONS, KAYE and ALEXANDER concur with Judge TITONE; Judge BELLACOSA dissents and votes to reverse in a separate opinion in which Chief Judge WACHTLER concurs; Judge HANCOCK, JR., dissents and votes to reverse separately in another opinion.
Order affirmed, with costs.
I vote to reverse and grant the petition to annul the determination of the New York City Department of Finance.
While I agree that there is a constitutional nexus to tax the dividend and capital gain income Bendix received from its investment in ASARCO, I would reach that conclusion based on a direct precedential and analytical path instead of the majority's circuitous, more precedentially troubling derivative benefits theory that the presence and activities of the payer of the dividend/capital gain (ASARCO) supplies the necessary nexus to support a tax on Bendix. The constitutionality of this tax should be determined on the taxpayer's (Bendix's) presence and activities in New York City. That alone is a sufficient taxing nexus in this case.
The majority's misdirected analysis on that threshold proposition then contributes to the wrong result in this case on the related question whether New York City's business privilege tax is unconstitutionally disproportionate to Bendix's activities in the City. By mistakenly focusing on the municipal benefits provided to the payer ASARCO, and derivatively reattributing them to Bendix, the majority rewards the taxing jurisdiction with the ability to double tax. The benefits directly provided to the taxpayer Bendix should control whether the business privilege tax is disproportionate.
In addition to the majority's description of the New York City tax scheme, I note that a corporate taxpayer's business allocation percentage (BAP) is based on its real or tangible personal property located in the City, receipts earned in the City, and wages and salaries paid to employees in the City — not those merely "connected with" (majority opn, at 76) the City. Also, Bendix purchased its ASARCO stock in the open market, solely for investment purposes, and ASARCO is not a subsidiary or affiliate of Bendix.
A patchwork of State and municipal taxation schemes has emerged in the vacuum caused by congressional inaction to uniformly regulate taxation of multijurisdictional corporate income. Constitutional challenges to those schemes have been asserted in the State and Federal courts proportionate to the increasingly sophisticated and wide-reaching taxing schemes implemented by the States and their constituent municipalities. As the United States Supreme Court has recognized:
"The resulting judicial application of constitutional principles to specific state statutes leaves much room for controversy and confusion and little in the way of precise guides to the States in the exercise of their indispensable power of taxation * * * [T]he decisions have been 'not always clear . . . consistent or reconcilable. A few have been specifically overruled, while others no longer fully represent the present state of the law.' From the quagmire there emerge, however, some firm peaks of decision which remain unquestioned." (Northwestern Cement Co. v Minnesota, 358 U.S. 450, 457-458, citing Miller Bros. Co. v Maryland, 347 U.S. 340, 344.)
Counterbalancing the threshold presumption of constitutionality of statutes, especially taxing statutes which impose a heavy burden of proof on objecting taxpayers, is another elementary but potent principle that a State cannot tax value earned outside its borders (ASARCO Inc. v Idaho State Tax Commn., 458 U.S. 307, 315; Connecticut Gen. Co. v Johnson, 303 U.S. 77, 80-81). However, identification of the specific geographic source of all the income of multijurisdictional corporations can be difficult and occasionally impossible to ascertain. Recognizing this difficulty, the United States Supreme Court long ago established that the entire net income of a business operating in interstate commerce including income from intangibles may be fairly apportioned among the States for tax purposes, by formulas utilizing in-State aspects of interstate affairs, to avoid unfair multiple taxation (Northwestern Cement Co. v Minnesota, 358 U.S. 450, 458-462, supra; Curry v McCanless, 307 U.S. 357, 368).
Constitutional challenges to State tax apportionment schemes often implicate mixed Due Process and Commerce Clause concerns. Due process requires a "'minimal connection' between the interstate activities and the taxing State, and a rational relationship between the income attributed to the State and the intrastate values of the enterprise" (Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425, 436-437; Trinova Corp. v Michigan Dept. of Treasury, 498 US ___, ___, 111 S Ct 818, 828). Complete Auto Tr. v Brady ( 430 U.S. 274) allows a tax over a Commerce Clause challenge if the tax (1) is applied to an activity with a substantial nexus with the taxing State; (2) is fairly apportioned; (3) does not discriminate against interstate commerce; and (4) is fairly related to the services provided by the State (id., at 279; Goldberg v Sweet, 488 U.S. 252, 266-267).
Allied/Bendix raises two challenges to the taxation of its ASARCO dividend and capital gain income. First, it argues that there is no constitutional nexus between Bendix's activities in the City and its ASARCO investment income. Second, Allied/Bendix contends that even if a constitutional nexus exists, the tax on Bendix's ASARCO investment income is not "fairly related," i.e., is disproportionate, to Bendix's activities in the City. The majority thus oversimplifies the issues in this case by stating that the question is "whether New York City may constitutionally tax any portion of the dividend and capital gain income" Bendix received from its ASARCO investment (majority opn, at 75). If a nexus exists, all of that income is subject to taxation. However, the actual measure of the tax that may be imposed must be proportionate to the taxpayer's activities in the taxing jurisdiction. That second, necessarily interrelated requirement governs the result in this case under my analysis and it cannot be conclusorily swept aside, as the majority has done.
The Due Process and Commerce Clause requirements erect a "minimal" constitutional nexus hurdle (majority opn, at 80). If the corporate taxpayer "avails itself of the 'substantial privilege of carrying on business' within the State", a nexus for taxation of income generated in interstate commerce — including income from intangibles used in its business in the State — is supplied (Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425, 437, 445, supra, quoting Wisconsin v Penney Co., 311 U.S. 435, 444-445; see, Curry v McCanless, 307 U.S. 357, 366-368, supra).
The sensible analytical focus of that inquiry should be on the protection, opportunities and benefits afforded to the taxpayer — here, Bendix — not those afforded to other corporations who contribute to the taxpayer's income by payment of dividends. Those corporations pay their own business privilege tax in return for the "protection, opportunities and benefits" provided to them by the City. I agree with Judge Hancock that Harvester Co. v Department of Taxation ( 322 U.S. 435) does not hold to the contrary (see, Hancock, J., dissenting opn, at 98-103). I therefore disagree with the majority that ASARCO's City presence, standing alone, satisfies the nexus requirement to support taxation of Bendix's ASARCO investment income. Bendix's New York City presence and business activities themselves provide a sufficient nexus.
Allied/Bendix does not dispute that Bendix's presence and international business activities in the City supply a constitutional nexus supporting imposition of the City general corporation income tax. Indeed, Bendix filed a City tax return for its 1981 fiscal year, and does not challenge the apportionment of $131,432 of its business income to the City. Allied/Bendix objects, however, to the tax on its ASARCO dividend and capital gains income because (1) its investment in ASARCO was planned, effectuated and overseen entirely through and at Bendix's Michigan headquarters, and Michigan is therefore the "source" of its investment income; and (2) because there is no unitary business relationship between Bendix and ASARCO. Both of these arguments fail.
Bendix's Michigan business presence and investment activities cannot be segregated from its New York City presence and activities to insulate Bendix from the City's tax on its ASARCO investment income. The Supreme Court has consistently rejected challenges to taxation of income based on the argument that the "'source of [particular] income may be ascertained by separate geographical accounting * * * [, where] the intrastate and extrastate activities formed part of a single unitary business'" (Trinova Corp. v Michigan Dept. of Treasury, 498 US ___, ___, 111 S Ct 818, 831, supra, quoting Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425, 438, supra; Exxon Corp. v Wisconsin Dept. of Revenue, 447 U.S. 207, 219). Allied/Bendix has not alleged that its City activities and its Michigan investment activities were discrete activities of a nonunitary business.
Alternatively, Allied/Bendix urges this Court to follow other State courts and summarily resolve this case in its favor based on the threshold, stipulated absence of a unitary business relationship between Bendix and ASARCO (see, Corning Glass Works v Virginia Dept. of Taxation, 241 Va. 353, 402 S.E.2d 35, cert denied ___ US ___, 112 S Ct 277; Bendix Corp. v Director, Div. of Taxation, 125 N.J. 20, 592 A.2d 536, cert granted sub nom. Allied-Signal, Inc. v Director, Div. of Taxation, ___ US ___, 112 S Ct 632). Judge Hancock, in separate dissent, agrees with this approach.
However, Allied/Bendix's argument in this respect does not go far enough or give enough credit to the complexity, uniqueness and sophistication of this legitimate taxing scheme. Here, I agree with the majority that the cases Allied/Bendix relies on for its asserted threshold infirmity — ASARCO Inc. v Idaho State Tax Commn. ( 458 U.S. 307, 315, supra), Woolworth Co. v Taxation Revenue Dept. ( 458 U.S. 354), and Mobil Oil Corp. v Commissioner of Taxes ( 445 U.S. 425, 437, supra) — do not hold that a unitary business relationship between the taxpayer and the investment income payer is a constitutional sine qua non to municipal taxation of investment income. The taxing schemes implicated in those cases establish two classes of corporate income from intangibles. "Business (intangible) income", defined as income from activities which are an "integral or necessary part" of the taxpayer's business operations, is apportioned under a three-factor formula. "Nonbusiness (intangible) income" is allocated entirely to the State where the taxpayer is domiciled. The City's tax scheme is distinctly and significantly different. Intangible income from all sources is apportioned to the City pursuant to the formula. Moreover, the issue before the Supreme Court in those cases was whether certain dividend and capital gain income the taxpayer received from its out-of-State subsidiaries and affiliates constituted taxable "business income" or nontaxable "nonbusiness income". ASARCO is not a subsidiary or affiliate of Bendix. The Supreme Court's narrow conclusion in those cases was that the lack of a unitary business relationship between the taxpayer and its subsidiary/affiliates required that the income be classified as nontaxable nonbusiness (intangible) income. Contrary to the majority's assertion (majority opn, at 81), the Supreme Court did not conclude that a corporate taxpayer's presence in the taxing jurisdiction would be an insufficient taxing nexus, without more, to support taxation of investment income. Indeed, Curry v McCanless ( 307 U.S. 357, supra) suggests to the contrary.
Inasmuch as I would conclude that Bendix's presence and business activities in the City provide a sufficient, direct nexus to tax its ASARCO investment income, the proportionality prerequisites must next be thoroughly considered. The Commerce and Due Process Clauses impose the "additional limitation that the measure of the tax must be reasonably related to the extent of the contact" (Commonwealth Edison Co. v Montana, 453 U.S. 609, 626 [emphasis added], citing Western Live Stock v Bureau, 303 U.S. 250, 254). This requirement, while closely related to the nexus requirement, is directed at the measure of the tax rather than whether the tax may constitutionally be imposed at all.
To survive Commerce Clause and due process scrutiny, a municipal corporate tax must be assessed "in 'proper proportion' to * * * activities within the [taxing jurisdiction] and, therefore, to [the taxpayer's] 'consequent enjoyment of the opportunities and protections which the State has afforded' in connection with those activities" (Commonwealth Edison Co. v Montana, 453 U.S. 609, 626, supra), in order to ensure that the taxpayer shoulders no more than its "just share of [the] state tax burden" (id., at 626, quoting Western Live Stock v Bureau, 303 U.S. 250, 254, supra; see, Exxon Corp. v Wisconsin Dept. of Revenue, 447 U.S. 207, 228, supra; General Motors v Washington, 377 U.S. 436, 441; Wisconsin v Penney Co., 311 U.S. 435, 446, supra).
The City Department of Finance, the lower courts and the majority conclude that the City tax on Bendix's ASARCO investment income is constitutional because the tax flows from a stream of investment income generated by the business activities of a payer within the City, ASARCO, which receives benefits from the City. Thus, the disproportionate business privilege tax imposed on Bendix is justified by reference to the benefits and privileges the City conferred upon ASARCO, as the investment income payer — benefits for which ASARCO already paid its own full business privilege tax. However, the United States Supreme Court cases support the view that the focus under the proportionality prerequisite must be on the taxpayer's (Bendix's) activities in the taxing jurisdiction, and on the benefits it (Bendix) receives in connection with those activities (Goldberg v Sweet, 488 U.S. 252, 266-267, supra; Commonwealth Edison Co. v Montana, 453 U.S. 609, 626-627, supra).
It is important to note in this respect that ASARCO bears its own full business privilege tax burden for the benefits the City affords it. Derivatively attributing those same benefits again to Bendix would impose a clearly offensive and duplicative tax — a governmental version of double-dipping. This is not the lawful and long-accepted "double" income tax regime allowed on a corporation's earnings and on its shareholders' dividends. This is a business privilege tax, which is different in kind and governed by distinguishable taxing principles. The majority appears to treat the tax imposed here as an ordinary income tax instead of a business privilege tax.
Finally, the lower courts' and the majority's novel "derivative benefit theory" would require taxpayers to shoulder an unconstitutional excess of their "'just share of [the] state tax burden'" (Commonwealth Edison Co. v Montana, 453 U.S. 609, 626, supra). That is precisely what happened in this case. $131,431 of Bendix's business income was apportioned to the City to reflect Bendix's presence there and, consequently, to "pay for" the full protection, opportunities and benefits the City afforded Bendix in connection with its City activities. While that, of course, is not the issue in this case, it bears on what happened next. The City then added $1,422,974 in apportioned income from Bendix's ASARCO investment source and increased Bendix's business privilege tax liability by 1,155% — obviously with no additional protection, opportunities or benefits afforded to Bendix's already fully taxed City activity. That increase in taxable income was "out of all appropriate proportion to the business" Bendix conducted in the City, exceeding even the 250% increase struck down by the Supreme Court in Rees' Sons v North Carolina ( 283 U.S. 123, 135).
In sum, the New York City General Corporation Tax on the investment income Bendix received from ASARCO overreached the proportionality limitations of the Commerce and Due Process Clauses.
The question is whether New York City may constitutionally impose a tax on Bendix's dividend and capital gain income from its investment in ASARCO, a company engaged in activities totally unrelated to those of Bendix. I conclude that the imposition of such a tax violates the "minimal nexus" and "fairly related" requirements of the Federal Due Process and Commerce Clauses. This conclusion, I think, is compelled by five recent decisions of the Supreme Court dealing with taxation of investment income under the unitary business principle (see, Container Corp. v Franchise Tax Bd., 463 U.S. 159; Woolworth Co. v Taxation Revenue Dept., 458 U.S. 354; ASARCO Inc. v Idaho State Tax Commn., 458 U.S. 307; Exxon Corp. v Wisconsin Dept. of Revenue, 447 U.S. 207; Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425). It is compelled, as well, by an analysis of general constitutional principles as seen in earlier Supreme Court decisions pertaining to State taxation of nondomiciliary corporations on income derived from interstate activities.
Inasmuch as New York City may not constitutionally tax Bendix for such unrelated investment income, it makes no difference that the source of that income is a corporation which happens to have a presence in the taxing jurisdiction. In this conclusion, I take issue with my colleagues who find some basis for the City's nexus to impose the questioned tax on Bendix because the City, based on ASARCO's presence, has an independent taxing nexus over ASARCO, the source of that income.
I
In determining whether a tax on a nondomiciliary corporation is violative of the Due Process Clause, the test is "whether the taxing power exerted by the state bears fiscal relation to protection, opportunities and benefits given by the state. The simple but controlling question is whether the state has given anything for which it can ask return" (Wisconsin v Penney Co., 311 U.S. 435, 444 [emphasis added]). The due process requirements are a minimal nexus between the taxed interstate activities and the taxing State and a rational relationship between the income being taxed and the intrastate values of the enterprise (see, Mobil Oil Corp. v Commissioner of Taxes, 445 U.S. 425, 436-437, supra). The "requisite 'nexus' is supplied if the corporation [being taxed] avails itself of the 'substantial privilege of carrying on business' within the State" (id., at 437). The four-part test for Commerce Clause compliance is whether the activities being taxed have a substantial nexus with the taxing authority, and the tax is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the authority (see, majority opn, at 79; Complete Auto Tr. v Brady, 430 U.S. 274). If the business of ASARCO had been sufficiently related to the business of Bendix so that the two could be said to have constituted a unitary business, the City's tax on the ASARCO dividends and capital gains would unquestionably have passed both the Due Process and Commerce Clause tests. For as the Supreme Court has emphasized, "the linchpin of apportionability in the field of state income taxation is the unitary-business principle" (Mobil Oil Corp. v Commissioner of Taxes, 445 US, at 439, supra). Where the income source and the recipient are unitary, the tax would bear "fiscal relation to protection, opportunities and benefits given [to the recipient] by the [taxing jurisdiction]" (Wisconsin v Penney Co., supra, at 444). Then — just as with the rest of the taxpayer's business income — it would not be true that the taxing jurisdiction had "given [nothing to the recipient] for which it [could] ask return" (id., at 444).
The nexus requirements under the Due Process and Commerce Clauses are essentially the same. The key is the connection between the taxed activities (here, Bendix's business activities) and the taxing State. As one commentator puts it:
"And, as a rough but constitutionally adequate measure of benefits conferred, one must look to the ways in which the taxed activities can be 'connected' with the taxing state. The degree of 'connection,' 'contact,' or 'nexus' between the taxing state and the interstate commerce taxed is also the fundamental measure of whether or not a state tax violates the commerce and due process clauses. Therefore, to the extent that a state can point to a substantial connection with a particular aspect of interstate commerce, it can also demonstrate that its program is consistent with the commerce and due process clauses" (Tribe, American Constitutional Law § 6-16, at 446 [2d ed] [emphasis added]).
That the unitary business principle is a limitation on the States' power to tax investment income is clear from the Court's language in Mobil that it did not mean to:
"suggest that all dividend income received by corporations operating in interstate commerce is necessarily taxable in each State where that corporation does business. Where the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State, due process considerations might well preclude apportionability, because there would be no underlying unitary business" ( 445 US, at 441-442, supra [emphasis added]).
The sole question in the present case is whether a tax may be constitutionally applied to investment income received by a nondomiciliary corporate taxpayer from its investment in a corporation engaged in a business wholly unrelated to the taxpayer's intrastate activities. That the answer to the question is "no", I believe, is now settled by the Supreme Court's two recent decisions in ASARCO (supra) and Woolworth (supra). (See generally, Hellerstein, State Income Taxation of Multijurisdictional Corporations, Part II: Reflections on ASARCO and Woolworth, 81 Mich L Rev 157.)
In ASARCO and Woolworth the Supreme Court reemphasized the basic principle of Mobil (supra) and Exxon (supra) that "the linchpin of apportionability * * * is the unitary-business principle" (Mobil Oil Corp. v Commissioner of Taxes, 445 US, at 439, supra). More importantly, the Court expressly rejected the attempts of Idaho and New Mexico to expand the concept of unitary business to embrace corporations where, as here, the only claimed relatedness is in the financial contribution that one makes to the other. Idaho and New Mexico, following the arguments of the Multistate Tax Commission, had urged that there is no meaningful distinction between business and nonbusiness income and that, therefore, the unitary business principle should apply to investment income regardless of its nature.
In ASARCO, Idaho had argued that:
"'When income is earned from activities which are part of a unitary business [ASARCO in and of itself] conducted in several states, then the requirement that the income bear relation to the benefits and privileges conferred by the several states has been met'" ( 458 US, at 325);
and that
"'When intangible assets such as, for example, shares of stock, are found to be a part of a taxpayer's own unitary business, . . . there is no logical or constitutional reason why the income from those same intangibles should be treated any differently than any other business income that that taxpayer might earn'" (id., at 325).
The Court, however, expressly rejected the position of the Multistate Tax Commission. In ASARCO, the Court stated:
"This definition of unitary business [proposed by the Multistate Tax Commission] would destroy the concept. The business of a corporation requires that it earn money to continue operations and to provide a return on its invested capital. Consequently all of its operations, including any investment made, in some sense can be said to be 'for purposes related to or contributing to the [corporation's] business.' When pressed to its logical limit, this conception of the 'unitary business' limitation becomes no limitation at all. When less ambitious interpretations are employed, the result is simply arbitrary.
"We cannot accept, consistently with recognized due process standards, a definition of 'unitary business' that would permit nondomiciliary States to apportion and tax dividends '[w]here the business activities of the dividend payor have nothing to do with the activities of the recipient in the taxing State' * * * In such a situation, it is not true that 'the state has given anything for which it can ask return'" ( 458 US, at 326-328, supra [emphasis added]).
Similarly, in Woolworth the Court held that the States' reasoning:
"would trivialize this due process limitation by holding it satisfied if the income in question 'adds to the riches of the corporation' * * * 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,' * * * not to whether the nondomiciliary parent derives some economic benefit — as it virtually always will — from its ownership of stock in another corporation" ( 458 US, at 363-364, supra [emphasis added]).
Thus, ASARCO and Woolworth — when read in conjunction with the Supreme Court's earlier unitary business decisions — leave no doubt that the unitary business principle is not only the means for taxing the income of a nondomiciliary from interstate activities but a limitation on the circumstances when such taxation is permitted. This reading of Woolworth and ASARCO is consistent with the rationale for taxing nondomiciliary corporations on income from interstate activities as seen in earlier cases — that the tax is constitutionally justified if it is paid in exchange for some service or benefit to the taxpayer provided by the taxing jurisdiction (see, e.g., Northwestern Cement Co. v Minnesota, 358 U.S. 450, 461-462 ["founders did not intend to immunize (interstate) commerce from carrying its fair share of the costs of the state government in return for the benefits it derives from within the State"]; id., at 469 [Harlan, J., concurring] [taxing statutes consistent with Interstate Commerce Clause as "a seeking of some compensation for facilities and benefits afforded by the taxing States to income-producing activities therein"]; Wisconsin v Penney Co., 311 U.S. 435, 444, supra [State tax valid under Due Process Clause if it "bears fiscal relation to protection opportunities and benefits given by the state"]; Bass, Ratcliff Gretton v Tax Commn., 266 U.S. 271, 280-282; Underwood Typewriter Co. v Chamberlain, 254 U.S. 113, 120-121; see also, Connecticut Gen. Co. v Johnson, 303 U.S. 77 [California could not tax reinsurance premiums paid in Connecticut to a Connecticut reinsurance company conducting business in California where premiums were paid by insurance companies doing business in California covering California risks]).
In the decisions dealing with State taxation of nondomiciliaries — whether applying the unitary business principle (see, e.g., Mobil Oil Corp. v Commissioner of Taxes, supra) or not (see, e.g., Wisconsin v Penney Co. supra) — the focus for the taxing justification has been on the activities of the taxpayer in the taxing State and whether those activities are in some way protected, enhanced or assisted by the taxing State; in other words, whether there is a quid pro quo. The source of the taxed income is irrelevant and it makes no difference whether it comes from a corporation with or without a presence in the State. When the activities of the source of the investment income are sufficiently related to the interstate activities of the taxpayer to support the unitary business concept, the necessary quid pro quo and the resultant "minimal nexus" for the tax are present. When that relatedness is not present, there can be no quid pro quo and no nexus. Thus, ASARCO's presence in New York City is of no moment. Imposing a tax on Bendix for the ASARCO investment income is contrary to the very essence of the rationale for taxing nondomiciliaries. Here, the activities of ASARCO giving rise to the income cannot be deemed to be those of Bendix and, thus, Bendix cannot be said to have received benefits from the benefits and protections given by the City to ASARCO's activities. In my view, taxing Bendix's investment income directly contravenes the teachings of Mobil, Exxon, ASARCO and Woolworth.
The courts of other States support the propositions that the unitary business principle is the sine qua non of State taxation of nondomiciliaries and that the focus of its application is on the functional integration of the taxed corporation and the source of the investment income (see, e.g., Bendix Corp. v Director, Div. of Taxation, 125 N.J. 20, 31, 592 A.2d 536, 542, cert granted sub nom. Allied-Signal, Inc. v Director, Div. of Taxation, ___ US ___, 112 S Ct 632 [unitary business principle "provides the foundation to satisfy due process and commerce clause restraints" on taxation of capital gains income where both the investing and invested corporations are present in the State]; Corning Glass Works v Virginia Dept. of Taxation, 241 Va. 353, 402 S.E.2d 35, cert denied ___ US ___, 112 S Ct 277 [nondomiciliary taxpayer's capital gains income received from sale of stock in nonunitary corporation also present in taxing jurisdiction not taxable under Mobil, ASARCO, and Woolworth]; Illinois Tool Works v Pledger, Ark Ch Ct, Pulaski County, Mar. 1990, No. 88-2406 [unitary business principle must be applied in all cases involving income earned from intangible property including dividend and capital gains income]; James v International Tel. Tel. Corp., 654 S.W.2d 865 [Mo 1983] [States may tax income earned outside their borders so long as the intrastate and extrastate activities form part of a single unitary business noting that the Supreme Court has rejected the claim that an investment relationship constitutes a unitary business]; see also, American Home Prods. Corp. v Limbach, 49 Ohio St.3d 158, 551 N.E.2d 201, cert denied ___ US ___, 111 S Ct 63; Brunner Enters. v Department of Revenue, 452 So.2d 550 [Fla]).
II
The majority concedes that under a unitary business analysis, the activities of ASARCO in New York may not be attributed to Bendix for the purpose of obtaining the necessary nexus to tax the ASARCO dividends and capital gains. Indeed, it maintains, as does the City, that the unitary business principle is irrelevant here. Thus, the tax on Bendix cannot be justified on the ground that the City, in providing protection or other benefits for ASARCO's activities, has necessarily provided protection and benefits for the activities of Bendix (see, Wisconsin v Penney Co., 311 U.S. 435, 444, supra). It is not disputed that ASARCO's business was unconnected with the activities of Bendix, and that these activities were limited to Bendix's business abroad and had nothing to do with its business of managing the company investments, conducted solely in the Michigan office.
ASARCO, of course, must pay its own corporate tax — just as Bendix does — for the privilege of doing business in New York City measured by the amount of business it does in the City (see, Bellacosa, J., dissenting opn, at 88).
Rather than basing its justification for taxing the ASARCO income on any benefits or protection for the activities of Bendix, the majority predicates its taxing nexus solely on Bendix's stock ownership in ASARCO, in the following passage:
"Here, it is undisputed that New York City has afforded privileges and opportunities to ASARCO. That these privileges and opportunities have contributed to ASARCO's capital appreciation and thus also inured to the benefit of all its shareholders, including Bendix, is also beyond question. Thus, we agree with the City that it has given Bendix something 'for which it can ask return,' and that consequently a sufficient nexus existed to support the City's tax" (majority opn, at 82 [emphasis added]).
As authority for its holding that benefits given to the dividend payor (ASARCO) may be attributed to the stockholder-recipient for the purpose of finding nexus (even in the absence of a unity of activity), the majority relies on language taken from three Supreme Court decisions pertaining to the Wisconsin Privilege Dividend Tax (Wisconsin v Penney Co., 311 U.S. 435, supra; Harvester Co. v Department of Taxation, 322 U.S. 435; Wisconsin Gas Co. v United States, 322 U.S. 526).
Wisconsin Laws of 1935 (ch 505, § 3) as amended by Laws of 1935 (ch 552).
But neither the language nor the principle of these cases supports the proposition for which the cases are cited: that when a taxing unit has taxing nexus over a corporation (as the City has over ASARCO), the taxing unit obtains an independent nexus for taxing the stockholders of that corporation when they receive dividends or capital gains income. Indeed, the Supreme Court decisions on the Wisconsin Privilege Dividend Tax stand for just the opposite proposition.
The Wisconsin Privilege Dividend Tax was enacted in 1935 to resolve an inequity in the Wisconsin taxing system resulting from "a special Wisconsin feature [creating an] exemption of dividends from personal taxation" (see, Wisconsin v Penney Co., supra, at 442). The idea underlying the enactment of the Privilege Dividend Tax was to accomplish indirectly what the Wisconsin Legislature could not accomplish directly — i.e., a scheme under which a tax would be levied on and paid by corporations but which would, in effect, be a tax borne by the shareholders (see, Wisconsin v Penney Co., 311 US, at 442, supra).
As the Penney court explained:
"This exemption persisted while regular and surtax rates against personal incomes were raised. Attempts at relief from the unfairness charged against this exemption of dividends, particularly advantageous to the higher brackets, were steadily pressed before the Wisconsin Legislature. To relieve local earnings of foreign corporations from a dividend tax would have had a depressive effect on wholly local enterprises. The Privilege Dividend Tax was devised to reduce at least in part the state's revenue losses due to dividend exemptions, and also to equalize the burdens on all Wisconsin earnings, regardless of the formal home of the corporation" ( 311 US, at 442).
The statute provided that for "the privilege of declaring and receiving dividends, out of income derived from property located and business transacted in this state" (Wisconsin v Penney Co., 311 US, at 440, n 1, supra), there would be a 2 1/2% tax on dividends declared and paid by "all corporations (foreign and local)" (id.) to be "deducted and withheld from such dividends payable to residents and non-residents by the payor corporation" (id.). Each dividend paying corporation was made liable for the tax and was required to deduct the tax from the dividends the corporation declared (id.).
After the Privilege Dividend Tax was enacted, it was immediately attacked as unconstitutional in cases brought by nondomiciliary corporations which transacted portions of their multistate businesses in Wisconsin. In Wisconsin v Penney Co. ( 311 U.S. 435, supra), the tax was upheld against the argument that it was an unconstitutional tax by Wisconsin on transactions beyond its borders — i.e., a tax on the privilege of declaring dividends, an action which took place at the corporate headquarters in New York. In rejecting this argument, Justice Frankfurter, for the majority, looked beyond the label of the tax and the fact that the "taxable event" (the declaration of dividends) happened outside the State, to the actual substance of the tax and that it gave the State a taxing nexus over the corporation in Wisconsin. The Court concluded that "[t]he practical operation of this legislation is to impose an additional tax on corporate earnings within Wisconsin but to postpone the liability for this tax until such earnings are paid out in dividends" (id., at 442) and that "the incidence of the tax as well as its measure is tied to the earnings which the State of Wisconsin has made possible" (id., at 446). The Court sustained the tax. It found the necessary basis for the tax in the State's nexus over the corporation, stating:
"The simple but controlling question is whether the state has given anything [to the corporation] for which it can ask return. The substantial privilege of carrying on business in Wisconsin, which has here been given, clearly supports the tax, and the state has not given the less merely because it has conditioned the demand of the exaction upon happenings outside its own borders. The fact that a tax is contingent upon events brought to pass without a state does not destroy the nexus between such a tax and transactions [of the corporation] within a state for which the tax is an exaction" (id., at 444-445 [emphasis added]).
It should be noted that nothing in Penney suggests that Wisconsin had a taxing nexus over any party other than the dividend payor corporation, let alone, over the shareholders of J.C. Penney. Indeed, such an interpretation is belied by the Penney majority's rejection of dissenting Justice Roberts' arguments that the Wisconsin tax was an unconstitutional tax on the shareholders (id., at 448 [Roberts, J., dissenting]) and not a tax levied on the corporation in Wisconsin, as the majority concluded.
It should be noted that the majority and the dissent were in complete agreement that a tax imposed directly on, and requiring an independent nexus over, the out-of-State shareholders would be unconstitutional. The disagreement was over the effect of the tax: i.e., whether, as the dissent argued, it was such a direct and independent levy on the shareholders.
Three and one-half years after Penney, the Supreme Court again sustained the Privilege Dividend Tax, in Harvester Co. v Department of Taxation ( 322 U.S. 435, supra). In the interim between Penney and Harvester, the Wisconsin Supreme Court had declared that "'the burden of the tax is specifically laid upon the stockholder'" (id., at 439 [emphasis added]) and that "'the corporation declaring the dividend must deduct the tax from the dividend and may not under any circumstances treat the tax as a necessary expense of doing business [for state income tax purposes]'" (id., at 439 [emphasis added]). Armed with these new holdings of the Wisconsin Supreme Court, the International Harvester Corp. joined the attack on the statute as violating the Due Process Clause by imposing a tax "on stockholders and on activities and objects outside the territory of the State of Wisconsin, and consequently outside its legislative jurisdiction" (id., at 439 [emphasis added]).
For the purposes of addressing these renewed arguments, in the light of the latest Wisconsin court holdings, the Supreme Court "assume[d] that the statute, by directing deduction of the tax from declared dividends * * * is thus, in point of substance, laid upon and paid by the stockholders" (id., at 440 [emphasis added]). Notwithstanding this assumption, the Supreme Court again upheld the Privilege Dividend Tax reaffirming its holding in Penney "that the practical operation of the tax is to impose an additional tax on corporate earnings within Wisconsin, but to postpone the liability for payment of the tax until such earnings are paid out in dividends" (Harvester Co. v Department of Taxation, supra, at 438 [citing Wisconsin v Penney Co., supra, at 442]). The Court concluded that:
"For the reasons stated in the Penney case we do not doubt that a state has constitutional power to make a levy upon a corporation, measured by so much of its earnings from within the state as it distributes in dividends, and to make the taxable event the corporation's relinquishment of the earnings to its stockholders. That power is not diminished or altered by the fact that the state courts, for purposes of their own, denominate the levy a tax on the privilege of declaring and receiving dividends, or that they decline to call it an income tax" ( 322 US, at 441 [emphasis added]).
And further that:
"The power to tax the corporation's earnings includes the power to postpone the tax until the distribution of those earnings, and to measure it by the amounts distributed. Compare Curry v. McCanless, 307 U.S. 357, 370. In taxing such distributions, Wisconsin may impose the burden of the tax either upon the corporation or upon the stockholders who derive the ultimate benefit from the corporation's Wisconsin activities" (Harvester Co. v Department of Taxation, supra, at 441 [emphasis added]).
That the burden of any tax which is taken out of the stockholder's dividends inevitably falls on the stockholders is obvious, as is the proposition that what benefits the corporation must benefit its stockholders. That the Court in Harvester alludes to these self-evident points in no way suggests that the burdens on the shareholders or the benefits they incidentally derive from benefits to the corporation (see, majority opn, at 82) could be a basis for Wisconsin's having a discrete taxing nexus over them, independent of its taxing nexus over the corporation. Indeed, the Court's holding in Harvester (dismissing the challenge to the statute as imposing an unconstitutional direct tax on the shareholders) echoed its earlier holding in Penney (rejecting Justice Roberts' dissent) that the burden which the statute places on the shareholders does not amount to a separate, direct tax on them and that, if it were so viewed, it would be unconstitutional for lack of nexus.
Finally, Wisconsin Gas Co. v United States ( 322 U.S. 526, supra) (see, majority opn, at 83, n 16) certainly does not hold that the Wisconsin Privilege Dividend Tax creates an independent taxing nexus over the shareholders that would support a direct tax on them. The limited holding of that case is that for the purposes of determining whether the corporation, rather than its shareholders, had a right to deduct the tax under section 23 (c) of the Revenue Act of 1934 (48 US Stat 680, 688), the tax, as described in the Wisconsin statute and treated by the Wisconsin Supreme Court, was "imposed" on the shareholders, not the corporation. The practical effect was only to preclude corporations from taking a section 23 (c) deduction for payment of the tax.
In sum, the taxpayers in Penney and Harvester were the corporations which paid out the dividends. The decisions hold no more than that Wisconsin had a taxable nexus over these corporations and that, therefore, the tax was valid even though the stockholders obviously bore the brunt of the deductions from their dividends. Here, the City and the majority seek to use Penney and Harvester as authority for the logically converse proposition: that the City has an independent nexus to tax — not the dividend payor, but the stockholder-dividend recipients solely because as stockholders they share in any benefit to the corporation. The cases do not support that proposition.
III
The majority's holding comes to this: a nondomiciliary corporation doing business in a taxing jurisdiction may be constitutionally taxed for income received from its investment in a corporation engaged in activities totally unrelated to those of the taxpayer so long as the corporation (i.e., the source of the income) is in the same taxing jurisdiction. The reasoning is that the benefits and protections that the investment has received from the taxing jurisdiction are necessarily passed on to and enjoyed by the owner in the income or profits it receives from the investment.
Whatever gloss may be put upon it, the proposition, in essence, is but an application of the unitary business principle to investment income from a source engaged in activities unrelated to the taxpayer, upon the theory that returns on invested capital are a conduit by which the benefits provided to the investment-corporation are transposed to the investor-corporation for the purposes of establishing nexus. But, it is precisely this argument — that a beneficial financial interrelationship between corporations results in a taxing nexus — that was rejected by the Supreme Court in ASARCO (supra, at 326-329) and Woolworth (supra, at 363-364) (see, discussion, supra, at 94-95 and n 2, at 94).
The inevitable consequence of the majority's decision is the unfair double taxation emphasized in Judge Bellacosa's dissent (Bellacosa, J., dissenting opn, at 91). Moreover, the practical effect of the holding could be to expose nondomiciliary investor-corporations to State taxation of investment income in every jurisdiction in which the investment-corporation is also present. Thus, Bendix (or one of its many unitary enterprises) could be taxed on the ASARCO dividends and capital gains in every taxing jurisdiction in which Bendix (or one of its unitary enterprises) and ASARCO (or one of its unitary enterprises) are both present regardless of the nature of the entities' activities in that jurisdiction. Under the rule adopted by the City and the majority, the following would be possible: because Bendix "is present" in all 50 States (see, Bendix Corp. v Director, Div. of Taxation, 125 N.J. 20, 24, supra), each corporation owning shares in Bendix could be taxed on the dividends and capital gains in every State in which that investing corporation is also present. Such a rule, I believe, defies the Supreme Court's holding in Mobil (supra) that it did "not mean to suggest that all dividend income received by corporations operating in interstate commerce is necessarily taxable in each State where that corporation does business" (Mobil Oil Corp. v Commissioner of Taxes, supra, at 441-442). One may easily imagine the resultant possibilities of overlapping taxes, complexities in record keeping and reporting, and of unfairness, particularly in situations when the taxed corporation is domiciled in a UDITPA State where it must report and pay a State tax on all of its investment income.
See, Uniform Division of Income for Tax Purposes Act, 7A ULA 336. Under UDITPA § 4, all nonbusiness corporate income is allocated to the State of domicile for taxation.
Would the majority's transfer-of-benefit rationale — applied here to impute benefits given a corporation to its shareholders — apply to other forms of investment, as well, e.g., preferred shares, bonds, debentures or other evidences of corporate debt? (See, ASARCO Inc. v Idaho State Tax Commn., supra, at 329-330, 330, n 25, and 334 [O'Connor, J., dissenting].) Since there is arguably some benefit to a creditor from whatever may benefit its debtor financially, particularly if the debt is unsecured, it would seem that the majority's rationale should apply for the purpose of obtaining taxing nexus over corporate creditors. It would be anomalous, to say the least, that a corporate owner of a bond should be susceptible to taxation on the bond interest in any jurisdiction where both the bond owner and bond issuer are present, regardless of their activities in that jurisdiction. Yet, this seems to be the logical extension of the majority's rule.
The highest courts of Virginia in Corning Glass (supra), and of New Jersey in Bendix Corp. v Director, Div. of Taxation (supra) have decided analogous State tax cases solely on the applicability or nonapplicability of the unitary business principle. They have apparently viewed the presence or absence of the investment source within the taxing jurisdiction as irrelevant to the required separate nexus over the taxed corporation. I agree with this conclusion and believe it is compelled by Supreme Court precedent and the basic constitutional rationale for a State's taxation of a nondomiciliary corporation. I would reverse.