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LEGAL INFORMATION INSTITUTE -- CORNELL LAW SCHOOL
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MEADWESTVACO CORP. v. ILLINOIS DEPT. OFREVENUE (06-1413 Syllabus)
http://www.law.cornell.edu/supct/html/06-1413.ZS.html
UNITED STATES v. CLINTWOOD ELKHORN MINING CO. (07-308 Syllabus)
http://www.law.cornell.edu/supct/html/07-308.ZS.html
(L041408B Orders)
http://www.law.cornell.edu/supct/html/041408.ZR.html
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MEADWESTVACO CORP. v. ILLINOIS DEPT. OF REVENUE (No. 06-1413)
Web-accessible at:
http://www.law.cornell.edu/supct/html/06-1413.ZS.html
Argued: January 16, 2008 -- Decided: April 15, 2008
Opinion author: Alito
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A State may tax an apportioned share of the value generated
by a multistate enterprise's intrastate and extrastate
activities that form part of a " 'unitary business.' "
Hunt-Wesson, Inc. v. Franchise Tax Bd. of Cal., 528 U.
S. 458 . Illinois taxed a capital gain realized by Mead,
an Ohio corporation that is a wholly owned subsidiary of
petitioner, when Mead sold its Lexis business division.
Mead paid the tax and sued in state court. The trial court
found that Lexis and Mead were not unitary because they
were not functionally integrated or centrally managed and
enjoyed no economies of scale. It nevertheless concluded
that Illinois could tax an apportioned share of Mead's
capital gain because Lexis served an operational purpose
in Mead's business. Affirming, the State Appellate Court
found that Lexis served an operational function in Mead's
business and thus did not address whether Mead and Lexis
formed a unitary business.
Held:
1. The state courts erred in considering whether Lexis
served an "operational purpose" in Mead's business after
determining that Lexis and Mead were not unitary. Pp. 6-13.
(a) The Commerce and Due Process Clauses impose distinct
but parallel limitations on a State's power to tax out-of-state
activities, and each subsumes the "broad inquiry" " 'whether
the taxing power exerted by the state bears fiscal relation
to protection, opportunities and benefits given by the
state,' " ASARCO Inc. v. Idaho Tax Comm'n, 458 U. S. 307
.. Because the taxpayer here did business in the taxing
State, the inquiry shifts from whether the State may tax
to what it may tax. Under the unitary business principle
developed to answer that question, a State need not "isolate
the intrastate income-producing activities from the rest
of the business" but "may tax an apportioned sum of the
corporation's multistate business if the business is unitary."
Allied-Signal, Inc. v. Director, Div. of Taxation, 504
U. S. 768 . Pp. 6-8.
(b) To address the problem arising from the emergence of
multistate business enterprises such as railroad and telegraph
companies--namely, that a State could not tax its fair
share of such a business' value by simply taxing the capital
within its borders--the unitary business principle shifted
the constitutional inquiry from the niceties of geographic
accounting to the determination of a taxpayer's business
unit. If the value the State wished to tax derived from
a "unitary business" operated within and without the State,
the State could tax an apportioned share of that business'
value instead of isolating the value attributable to the
intrastate operation. E.g., Exxon Corp. v. Department of
Revenue of Wis., 447 U. S. 207 . But if the value derived
from a "discrete business enterprise," Mobil Oil Corp.
v. Commissioner of Taxes of Vt., 445 U. S. 425 , the State
could not tax even an apportioned share. E.g., Container
Corp. of America v. Franchise Tax Bd., 463 U. S. 159 .
This principle was extended to a multistate business that
lacked the "physical unity" of wires or rails but exhibited
the "same unity in the use of the entire property for the
specific purpose," with "the same elements of value arising
from such use," Adams Express Co. v. Ohio, 165 U. S. 194
; and it has justified apportioned taxation of net income,
dividends, capital gain, and other intangibles. Confronting
the problem of how to determine exactly when a business
is unitary, this Court found in Allied-Signal that the
"principle is not so inflexible that as new [finance] methods
.... and new [business] forms ... evolve it cannot be modified
or supplemented where appropriate," 504 U. S., at 786,
and explained that situations could occur in which apportionment
might be constitutional even though "the payee and the
payor [were] not ... engaged in the same unitary business,"
id., at 787. In that context, the Court observed that an
asset could form part of a taxpayer's unitary business
if it served an "operational rather than an investment
function" in the business, ibid.; and noted that Container
Corp., supra, at 180, n. 19, made the same point. Pp. 8-11.
(c) Thus, the "operational function" references in Container
Corp. and Allied-Signal were not intended to modify the
unitary business principle by adding a new apportionment
ground. The operational function concept simply recognizes
that an asset can be a part of a taxpayer's unitary business
even without a "unitary relationship" between the "payor
and payee." In Allied-Signal and in Corn Products Co. v.
Commissioner, 350 U. S. 46 , the conclusion that an asset
served an operational function was merely instrumental
to the constitutionally relevant conclusion that the asset
was a unitary part of the business conducted in the taxing
State rather than a discrete asset to which the State had
no claim. Container Corp. and Allied-Signal did not announce
a new ground for constitutional apportionment, and the
Illinois Appellate Court erredin concluding otherwise.
Here, where the asset is another business, a unitary relationship's
"hallmarks" are functional integration, centralized management,
and economies of scale. See Mobil Oil Corp., supra, at
438. The trial court found each hallmark lacking in finding
that Lexis was not a unitary part of Mead's business. However,
the appellate court made no such determination. Relying
on its operational function test, it reserved the unitary
business question, which it may take up on remand. Pp.
11-13.
2. Because the alternative ground for affirmance urged
by the State and its amici--that the record amply demonstrates
that Lexis did substantial business in Illinois and that
Lexis' own contacts with the State suffice to justify the
apportionment of Mead's capital gain--was neither raised
nor passed upon in the state courts, it will not be addressed
here. The case for restraint is particularly compelling
here, since the question may impact other jurisdictions'
laws. Pp. 13-14.
371 Ill. App. 3d 108, 861 N. E. 2d 1131, vacated and remanded.
Alito, J., delivered the opinion for a unanimous Court.
Thomas, J., filed a concurring opinion.
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