Woolworth Co. v. Taxation Dept., 458 U.S. 354 (1982)

F. W. Woolworth Co. v. Taxation and Revenue

Department of New Mexico
No. 80-1745

Argued April 19, 1982
Decided June 29, 1982
458 U.S. 354

APPEAL FROM THE SUPREME COURT OF NEW MEXICO

Syllabus

Appellant’s principal place of business and commercial domicile are in New York, but it engages in chainstore retailing throughout the United States. Under its income tax laws, New Mexico distinguishes between "business" income, which it apportions between it and other States, and "nonbusiness" income, which it generally allocates to a single State on the basis of commercial domicile. Appellant reported its dividend income from four of its foreign subsidiaries, which engage in chainstore retailing in foreign countries, as "nonbusiness" income, none of which was to be allocated to New Mexico. Similarly, appellant did not report as New Mexico "business" income a sum, commonly known as "gross-up," that it never actually received from its foreign subsidiaries but that the Federal Government (for purposes of calculating appellant’s federal foreign tax credit) deemed it to have received. On audit, appellee determined that appellant should have included in its apportionable New Mexico income both the dividends and the gross-up figure. Appellant’s protest was denied, but appellee’s decision was reversed by the New Mexico Court of Appeals. However, the New Mexico Supreme Court, in turn, reversed, holding that both the dividends and the gross-up figure were apportionable New Mexico income.

Held:

1. New Mexico’s tax on a portion of the dividends received by appellant from its foreign subsidiaries fails to meet established due process standards. Pp. 362-372.

(a) The linchpin of apportionability for state income taxation of an interstate enterprise is the "unitary-business principle." Appellant -- as owner of all of the stock of three of its subsidiaries and a majority interest in the fourth -- potentially has the authority to operate these companies as integrated divisions of a single unitary business. But the potential to operate a company as part of a unitary business is not dispositive when, as here, the dividend income from the subsidiaries in fact is derived from unrelated business activity of the subsidiaries, each of which operates a discrete business enterprise. ASARCO Inc. v. Idaho State Tax Comm’n, ante, p. 307; Mobil Oil Corp. v. Commissioner of Taxes of Vermont, 445 U.S. 425. P. 362.

(b) For due process purposes, the income attributed to a State must be rationally related to values connected with the taxing State. This limitation is not satisfied merely because the nondomiciliary parent corporation derives some economic benefit from its ownership of stock in another corporation. Pp. 363-364.

(c) None of the factors relevant to a State’s right to tax dividends from foreign subsidiaries exists in this case. The record shows that appellant’s and its subsidiaries’ operations -- such as store site selection, advertising, accounting, purchasing, warehousing, and personnel training -- were not functionally integrated. And except for the type of occasional oversight -- with respect to capital structure, major debt, and dividends -- that any parent gives to an investment in a subsidiary, there was little or no integration of business activities or centralization of management. Thus, the subsidiaries were not a part of a "unitary business." Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, distinguished. Pp. 364-372.

2. New Mexico’s efforts to tax the "gross-up" income also contravenes the Due Process Clause. The "fictitious" gross-up figure is treated for federal foreign tax credit purposes as a dividend in the same manner as a dividend actually received by the domestic corporation from a foreign corporation. In this case, the foreign tax credit arose from the taxation by foreign nations of appellant’s foreign subsidiaries that had no unitary business relationship with New Mexico. Pp. 372-373.

95 N.M. 519, 624 P.2d 28, reversed.

POWELL, J., delivered the opinion of the Court, in which BURGER, C.J., and BRENNAN, WHITE, MARSHALL, and STEVENS, JJ., joined. BURGER, C.J., filed a concurring opinion, ante p. 331. O’CONNOR, J., filed a dissenting opinion, in which BLACKMUN and REHNQUIST, JJ., joined, post, p. 373.