Allied-Signal Inc. v. Commissioner of Finance

• Decision Date: 23 December 1991
• Docket Number: ALLIED-SIGNAL
• Citation: 580 N.Y.S.2d 696,588 N.E.2d 731,79 N.Y.2d 73
• Parties: , 588 N.E.2d 731, 60 USLW 2432 In the Matter ofINC., as Successor in Interest to Bendix Corporation, Appellant, v. COMMISSIONER OF FINANCE, Respondent.
• Court: New York Court of Appeals Court of Appeals

Page 696

580 N.Y.S.2d 696

79 N.Y.2d 73, 588 N.E.2d 731, 60 USLW 2432

In the Matter of ALLIED-SIGNAL INC., as Successor in Interest to Bendix Corporation, Appellant, v. COMMISSIONER OF FINANCE, Respondent.

Court of Appeals of New York.

Dec. 23, 1991.

[79 N.Y.2d 74] [588 N.E.2d 732] Walter Hellerstein, Arthur R. Rosen and Paul H. Frankel, New York City, for appellant.

Victor A. Kovner, Corp. Counsel, New York City (Anshel David, Edith I. Spivack and Edward F.X. Hart, of counsel), for respondent.

[79 N.Y.2d 75] Robert Abrams, Atty. Gen., New York City (Frederic L. Lieberman and August L. Fietkau, of counsel), for New York State Dept. of Taxation and Finance, amicus curiae.

OPINION OF THE COURT

TITONE, Judge.

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. ¹ For the reasons that follow, we conclude that the City may do so without offending either the Due Process Clause (U.S. Const. 14th Amend.) or the Commerce Clause (U.S. Const., art. I, § 8) of the Federal Constitution.

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]. ² 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.

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). ³

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.). ⁴ 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.

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. ⁵ Bendix thereafter petitioned the department for a redetermination. Relying on Woolworth Co. v. Taxation & Revenue Dept., 458 U.S. 354, 102 S.Ct. 3128, 73 L.Ed.2d 819 and ASARCO Inc. v. Idaho State Tax Commn., 458 U.S. 307, 102 S.Ct. 3103, 73 L.Ed.2d 787, 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. ⁶ 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.

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, 552 N.Y.S.2d 195), and on appeal, the Appellate Division, First Department, affirmed (167 A.D.2d 327, 562 N.Y.S.2d 76). Both courts, relying in part on Harvester Co. v. Department of Taxation, 322 U.S. 435, 64 S.Ct. 1060, 88 L.Ed. 1373, 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, 103 S.Ct. 2933, 2939, 77 L.Ed.2d 545; Woolworth Co. v. Taxation & Revenue Dept., supra, 458 U.S., at 363, 102 S.Ct., at 3134; ASARCO Inc. v. Idaho State Tax Commn., supra, 458 U.S., at 315, 102 S.Ct., at 3108; Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 436-437, 100 S.Ct. 1223, 1231-1232, 63 L.Ed.2d 510). 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 extraterritorial values being taxed" ' " (Container Corp. v. Franchise Tax Bd., supra, 463 U.S., at 164, 103 S.Ct., at 2939, quoting Exxon Corp. v. Wisconsin Dept. of Revenue, 447 U.S. 207, 221, 100 S.Ct. 2109, 2119, 65 L.Ed.2d 66, in turn quoting Butler Bros. v. McColgan, 315 U.S. 501, 507, 62 S.Ct. 701, 704, 86 L.Ed. 991, in turn quoting Norfolk & W. Ry. Co. v. North Carolina, 297 U.S. 682, 688, 56 S.Ct. 625, 628, 80 L.Ed. 977). 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. ⁷ We address each of these arguments in turn.

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, 463 U.S., at 165-166, 103 S.Ct., at 2940-2941; Exxon Corp. v. Wisconsin Dept. of Revenue, supra, 447 U.S., at 219-220, 100 S.Ct., at 2118-2119). 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. ⁸ 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...