463 U.S. 159 (1983), 81-523, Container Corp. of America v. Franchise Tax Bd.

Docket Nº:No. 81-523.
Citation:463 U.S. 159, 103 S.Ct. 2933, 77 L.Ed.2d 545
Case Date:June 27, 1983
Court:United States Supreme Court

Page 159

463 U.S. 159 (1983)

103 S.Ct. 2933, 77 L.Ed.2d 545




No. 81-523.

United States Supreme Court.

June 27, 1983

Argued Jan. 10, 1983.

Taxpayer, a Delaware corporation headquartered in Chicago, appealed from judgment of Superior Court, County of San Francisco, denying partial refund of corporation franchise taxes paid. The Court of Appeal affirmed, 117 Cal.App.3d 988, 173 Cal.Rptr. 121. On appeal by the taxpayer, the Supreme Court, Justice Brennan, held that: (1) state court in determining that there was unitary business reached conclusion within realm of permissible judgment, and two factors deserving particular mention were flow of capital resources from taxpayer to its subsidiaries through loans and loan guarantees and managerial role played by taxpayer in its subsidiaries' affairs; (2) California's use of standard three-factor formula to apportion income of unitary business was fair; and (3) it could not be concluded that California franchise tax, even as applied to multinational enterprise, was preempted by federal law or fatally inconsistent with federal policy.


Justice Powell dissented and filed opinion in which the Chief Justice and Justice O'Connor joined.

[103 S.Ct. 2937] Syllabus[*]


California imposes a corporate franchise tax geared to income. It employs the "unitary business" principle and formula apportionment in applying that tax to corporations doing business both inside and outside the State. The formula used--commonly called the "three-factor" formula--is based, in equal parts, on the proportion of a unitary business' total payroll, property, and sales that are located in the State. Appellant paperboard packaging manufacturer is a Delaware corporation headquartered in Illinois and doing business in California and elsewhere. It also has a number of overseas subsidiaries incorporated in the countries in which they operate. In calculating for the tax years in question in this case the share of its net income that was apportionable to California under the three-factor formula, appellant omitted all of its subsidiaries' payroll, property, and sales. Appellee Franchise Tax Board issued notices of additional assessments, the gravamen of which was that appellant should have treated its overseas subsidiaries as part of its unitary business rather than as a passive investment. After paying the additional assessments under protest, appellant brought an action for a refund in California Superior Court, which upheld the additional assessments. The California Court of Appeal affirmed.


1. California's application of the unitary business principle to appellant and its foreign subsidiaries was proper. Pp. 2945 - 2948.

(a) The taxpayer has the burden of showing by "clear and convincing evidence" that the state tax results in extra-territorial values being taxed. This Court will, if reasonably possible, defer to the judgment of state courts in deciding whether a particular set of activities constitutes a "unitary business." The Court's task is to determine whether the state court applied the correct standards to the case, and, if it did, whether its judgment was within the realm of a permissible judgment. Pp. 2945 - 2946.

(b) Here, there is no merit to appellant's argument that the Court of Appeal in important part analyzed the case under the incorrect legal standard. Rather, the factors relied upon by the court in holding that appellant and its foreign subsidiaries constituted a unitary business--

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which factors included appellant's assistance to its subsidiaries in obtaining equipment, in filling personnel needs that could not be [103 S.Ct. 2938] met locally, the substantial role played by appellant in loaning funds to the subsidiaries and guaranteeing loans provided by others, the considerable interplay between appellant and its subsidiaries in the area of corporate expansion, the substantial technical assistance provided by appellant to the subsidiaries, and the supervisory role played by appellant's officers in providing general guidance to the subsidiaries--taken in combination clearly demonstrate that the court reached a conclusion "within the realm of permissible judgment." Pp. 2946 - 2948.

2. California's use of the three-factor formula to apportion the income of the unitary business consisting of appellant and its foreign subsidiaries was fair. Appellant had the burden of proving that the income apportioned to California was out of all appropriate proportions to the business transacted in the State. This burden was not met by offering various statistics that appeared to demonstrate not only that wage rates are generally lower in the foreign countries in which appellant's subsidiaries operate but also that those lower wage rates are not offset by lower levels of productivity. It may well be that in addition to the foreign payroll going into the production of any given corrugated container by a foreign subsidiary, there is a California payroll, as well as other California factors, contributing to the same production. The mere fact that this possibility is not reflected in appellant's accounting does not disturb the underlying premises of the formula apportionment method. Pp. 2948 - 2949.

3. California had no obligation under the Foreign Commerce Clause to employ the "arm's-length" analysis used by the Federal Government and most foreign nations in evaluating the tax consequences of intercorporate relationships. Japan Line, Ltd. v. County of Los Angeles, 441 U.S. 434, 99 S.Ct. 1813, 60 L.Ed.2d 336, distinguished. Pp. 2950 - 2957.

(a) The double taxation occasioned by the California scheme is not impermissible. Due in part to the difference between a tax on income and a tax on tangible property, California would have trouble avoiding double taxation of corporations subject to its franchise tax even if it adopted the arm's-length approach. Moreover, the California tax does not result in "inevitable" double taxation. It would be perverse, simply for the sake of avoiding double taxation, to require California to give up one allocation method that sometimes results in double taxation in favor of another allocation method that sometimes has the same result. Pp. 2952 - 2955.

(b) The California tax does not violate the "one voice" standard established in Japan Line, supra, under which a state tax at variance with federal policy will be struck down if it either implicates foreign policy issues which must be left to the Federal Government or violates a clear

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federal directive. Three factors weigh strongly against the conclusion that the tax might lead to significant foreign retaliation. The tax does not create anautomatic "asymmetry" in international taxation, it is imposed on a domestic corporation and not on a foreign entity, and even if foreign nations had a legitimate interest in reducing the tax burden of domestic corporations, appellant is amenable to be taxed in California one way or another and the tax it pays is more the function of California's tax rate than of its allocation method. Moreover, the California tax is not pre-empted by federal law or fatally inconsistent with federal policy. There is no claim that the federal tax statutes themselves provide the necessary pre-emptive force. The requirement of some tax treaties that the Federal Government adopt some form of arm's-length analysis in taxing the domestic income of multinational enterprises is generally waived as to taxes imposed by each of the contracting nations on its own domestic corporations. Tax treaties do not cover the taxing activities of States. And Congress has never enacted legislation designed to regulate state taxation of income. Pp. 2955 - 2957.

[103 S.Ct. 2939] 117 Cal.App.3d 988, 173 Cal.Rptr. 121, affirmed.


Franklin C. Latcham argued the cause for appellant. With him on the briefs was Prentiss Willson, Jr.

Neal J. Gobar, Deputy Attorney General of California, argued the cause for appellee. With him on the brief was George Deukmejian, Attorney General.*

* Briefs of amici curiae urging reversal were filed by Marlow W. Cook, Lee H. Spence, and Robert L. Ash for Allied Lyons p.l.c. et al.; by J. Elaine Bialczak for Coca-Cola Co.; by George W. Beatty and William L. Goldman for Colgate-Palmolive Co.; by James H. Peters, Paul H. Frankel, and Jean A. Walker for the Committee on State Taxation of the Council of State Chambers of Commerce; by Valentine Brookes and Lawrence V. Brookes for EMI Limited et al.; by William H. Allen, John B. Jones, Jr., and Mark I. Levy, for the Financial Executives Institute; by Neil Papiano and Dennis A. Page for Firestone Tire & Rubber Co.; and by Jeffrey G. Balkin, pro se, for Jeffrey G. Balkin et al.

Briefs of amici curiae urging affirmance were filed by David H. Leroy, Attorney General of Idaho, Theodore V. Spangler, Jr., Deputy Attorney General, and David L. Wilkinson, Attorney General of Utah, for the State of Idaho et al.; by Tyrone C. Fahner, Attorney General, Fred H. Montgomery, Special Assistant Attorney General, and Lloyd B. Foster for the State of Illinois; byMichael J. Rieley, Special Assistant Attorney General, for the State of Montana; by Jeff Bingaman, Attorney General, and Lisa Gillard Gmuca, Assistant Attorney General, for the State of New Mexico; by Robert Abrams, Attorney General, Francis V. Dow, Assistant Attorney General, and Peter H. Schiff for the State of New York; by Robert O. Wefald, Attorney General, and Kenneth M. Jakes, Assistant Attorney General, for the State of North Dakota; by Dave Frohnmayer, Attorney General, Stanton F. Long, Deputy Attorney General, William F. Gary, Solicitor General, and Theodore W. de Looze, Assistant Attorney General, for the State of Oregon; by William D. Dexter, Wilson Condon, Attorney General of Alaska, James R. Eads, Jr., J.D. MacFarlane, Attorney...

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