^* [Reproduced from U.S. Congress, Senate, Executive Q (96th Congress, 1st Session) (Washington: GPO, 1979).]

^* [Reproduced from the text provided by the U.S. Department of the Treasury.]

^* [Reproduced from U.S. Congress, House, Committee on Ways and Means, Joint Committee Print, prepared by the staff of the Joint Committee on Taxation, March 28, 1980.]

¹ Those States which do not follow this three-factor formula use other apportionment formulas, some based on sales only and others based on a combination of sales and property or sales and payroll or property and payroll. Even among those States which do use the basic three-factor formula, the manner of measuring the three items in the formula may differ. For example, in some States a sale Is taken into account by the State where the sale originated (generally, the location of the seller) while in other States the sale is allocated to the State of destination (generallv where the buyer is located).

² The House-passed version of the Revenue Act of 1962 contained an amendment to section 482 which provided special rules for allocating taxable income arising from sales of tangible property within a related group which includes foreign corporations. The allocation was to be made by taking into consideration that portion of the payroll, property, expenses, and other factors of the group attributable to the United States and that portion which is not. Although this method is somewhat analogous to the application of the unitary method on a combined reporting basis, it was to be applied only with respect to income from intercompany sales rather than with rpspert to the entire operations of the group. The provision was deleted from the bill as finally enacted because the Conferees agreed that Treasury had the authority to prescribe under section 4S2 rules which would accomplish that objective and Treasury was directed to explore the possibility of promulgating regulations which would do so. As noted above, the regulations promulgated In response to this direction generally adopted a different approach.

¹ This issue was atao raised in Aarco Inc. v. Idaho State Tate Comm'n (No. 78-1839). vacated and remanded by the Supreme Court for further consideration in light of Mobil.

² K.R. 2158 (90th Cong.) and H.R. 7906 (91st Cong.).

³ The task force was comprised of 10 members of the Ways and Means Committee, with Mr. Rostenkowski as chairman. It submitted its report on March 8. 1997.

⁴ U.S. Exec. Rep. No. 06-5. 00th Cong.. 1st Sess. (1979).

¹ Under subpart F. a foreign corporation is generally a controlled foreign corporation (CFC) if more than .50 percent of the voting power is held by “Knited States shareholders,” that is. T'.S. persons each of whom owns at least 10 percent of the voting iwnver. The T.S. shareholders are generally required to include currently in their income (as a constructive dividend) their pro rata shares of certain undistributed tax-haven and passive income of the CFC.

² The following discussion assumes that the taxable corporation elects to credit, rather than deduct, foreign income taxes and thaf it has the 10-percent or larger interest in the foreign corporation required in order to claim the foreign tax credit for taxes paid by the foreign corporation which are attributable to the dividend. 3The actual amount of a dividend may be smaller than the formula amount if the taxable corporation also receives other dividends during the taxable year. This may be illustrated by returning to the example in which the foreign country imposed a 23 percent tax on corporate Income and assuming that the U.8. corporation also received a dividend of $900 from another foreign affiliate during the year from which a foreign income tax of 5 percent ($45) was withheld. I’nder the formula, the grossed-up amount of the ft rut dividend ($100) would be multiplied by a fraction, the numerator of which is the total foreign income taxes paid ($23 plus $45. or $68), and the denominator ofwbich is 46 percent of the total grossed-up dividends (46 percent of the sum of $100 and $900, or $460). The excliidible amount would thns be $100X$68/$460, or $15, and the taxable amount umler the formula would be $85 ($100 minus $15). In this case, the actual amount of the dividend ($77) would be less than the formula amount, and would lie the maximum subject to State or local tax. As to the $900 dividend, the actual amount of the dividend is $900. Under the formula, the exclusion is $900X$68/$46O, or $133. Thus the formula limit is $767. which is leas than $900 and thus would apply. The total amount tohich could be included in the I’.S. contortion's Income with resiiect to the two dividends would be $844 ($77 plus $767).

⁴ This provision would appear to italic>ermit a C.S. corporation to insulate all its foreign source income (not just its foreign source dividends) from State taxation by placing the assets which generate that activity in a domestic subsidiary. If the subsidiary obtained its income from foreign sources, then that income could not be included in the unitary income of the parent under the first part of the bill. Moreover, a 100-percent deduction for (or elimination of) dividends from the subsidiary would be available to the parent, so no State tax could lie imposed when the subsidiary italic>aid the income to the parent as a dividend. This could be accomplished without increasing the Federal tax burden of the imrent. If the committee adopts the provisions of the bill exempting foreign source dividends, it may wish to clarify whether or not this result is intended.

^* [The observations contained in the first Note were forwarded to the U.S. Department of State by the Italian Embassy on behalf of the Nine EEC Governments on March 19, 1980. The observations in the second Note are those of the United Kingdom.]

^* [Reproduced from the text provided by the U.S. Supreme Court. Chief Justice Burger and Justices Brennan, White, Powell, and Rehnquist joined the Opinion delivered by Justice Blackmun. Justices Stewart and Marshall took no part in the consideration or decision of the case. Justice Stevens filed a dissenting opinion which appears at I.L.M. page 766.

[The Supreme Court Decision in Japan Line, Ltd. v. County of Los Angeles appears at 18 I.L.M. 878 (1979).]

² For the same taxable years, appellant reported aggregate sales of $3,577,148,701, $3,889,353,228, and $4,049,824,161, respectively; total payroll of $380,818,887, $400,087,593, and $428,900,681, respectively; and property valued in the aggregate at $2,871,922,965, $2,995,950,125 and $3,291,- 757, 721, respectively. App. 35, 49, 63. For 1972, which is not unrepresentative, the ratios of appellant's Vermont sales, payroll, and property to its sales, payroll, and property “everywhere” were approximately .24%, .06% and .25%. respectively. Id., at 63, 64.

³ Section 5811 (18) states in pertinent part: ” ‘Vermont net income’ means, for any taxable year and for any corporate taxpayer, the taxable income of the taxpayer for that taxable year under the laws of the United States, excluding income which under the laws of the United States is exempt from taxation by the states.”

⁴ Section 5833 provides in pertinent part:

“(a) … If the income of a taxable corporation is derived from any trade, business, or activity conducted both within and without this state, the amount of the corporation's Vermont net income which shall be apportioned to this state, so as to allocate to this state a fair and equitable portion of that income, shall be determined by multiplying that Vermont net income by the arithmetic, average of the following factors:

“(1) The average of the value of all the real and tangible property within this state (A) at the beginning of the taxable year and (B) at the end of the taxable year, expressed as a percentage of all such property both within and without this state;

“(2) The total wages, salaries, and other personal service compensation paid during the taxable year to employees within this state, expressed as a percentage of all such compensation paid whether within or without this state;

“(3) The gror-s sales, or charges for services performed, within this state, expressed as a percentage of such sales or charges within or without this state.”

⁵ This information is taken from appellant's Vermont income tax returns, to which copies of its federal returns were attached. App. 33-73. It appears that the major share of appellant's dividend income for the three years was received from three wholly owned subsidiaries incorporated abroad (Mobil Marine Transportation, Ltd.; Mobil Oil Iraq with Limited Liability; and Pegasus Overseas, Ltd.) and from one affiliate incorporated in Delaware (Arabian American Oil Co. (ARAMCO)) of which appellant owned 10% of the capital stock. Id., at 75-78.

⁷ The Department calculated Mobil's tax liability for 1970 at $19,078.56; for 1971 at $31,955.52; and for 1972 at 825,384.69. Juris. Statement la.

⁸ Section 5833 (b) provides:

“If the application of the provisions of this section does not fairly represent the extent of the business activities of a corporation within this state, the corporation may petition for, or the commissioner may require, with respect to all or any part of the corporation's business activity, if reasonable:

“(1) Separate accounting;

“(2) The exclusion or modification of any or all of the factors;

“(3) The inclusion of one or more additional factors which will fairly represent the corporation's business activity in this state; or

“(4) The employment of any other method to effectuate an equitable allocation and apportionment of the corporation's income.”

By amendment effected by 1971 Vt. Laws, No. 73, § 16, the words “any or all” in subsection (2) replaced the words “either or both.”

⁹ In reaching this decision, the Commissioner followed F. W. Woolworth Co. v. Commissioner of Tares, 130 Vt. 544, 298 A. 2d 839 (1972), and Gulf Oil Corp. v. Morrison, 120 Vt. 324. 141 A. 2d 671 (1958). Juris. Statement 6a-7a, 9a-lla. He also rejected, for lack of proof, Mobil's petition for modification of the apportionment formula:

“Any diversion from the standard formula imposes a strong burden of proof on the taxpayer to show that the formula does not fairly represent its business activities in the State of Vermont… . Mobil has made no such showing in this case.” Id., at 11a.

The Commissioner did allow a modification of the method of dividend “gross-up” for the year 1970 in a manner consistent with F. W. Woolworth Co. v. Commissioner of Taxes, 133 Vt. 93, 328 A. 2d 402 (1974). This modification is not germane to the present controversy.

¹⁰ The Court also observed, 136 Vt., at 547-548, 394 A. 2d, at 1149, that due process contentions similar to tho6e advanced by Mobil here had been rejected in two Vermont cases that came down after the decision in the present case in the Superior Court. In re Goodyear Tire dk Rubber Co., 133 Vt. 132, 335 A. 2d 310 (1975); F. W. Woolworth Co. v. Commissioner of Taxes, 133 Vt 93, 328 A. 2d 402 (1974).

¹¹ The dissent raises de novo the issue of appellant's dividend receipts from stockholdings in corporations that apparently ojx-rate principally in the United States. See post, at 7-8, 12. This issue Ls not encompassed in the questions presented by appellant. See Juris. Statement 2-3.

¹² Under the Vermont tax scheme, income falling info this category is subject to apportionment only in part. Because Vermont's statute is geared to the definition of taxable income under federal law, it excludes from the preapportionment tax base 8.5% of all dividends earned from domestic corporations in which the taxpayer owns less than 80% of the capital stock, and 100%. of all dividends earned from domestic corporationin which the taxpayer owns MK,f or more of the capital .Hock. See § 24′S of the Internal Revenue Code of L’).”4, as amended, 2o 1 S C. § 243; Yt. Stat. Ann., Tit. 32, § 5x11 (IK) (1970 and Supp. 1978).

¹⁴ “See United States Steel Corp. v. Midtistate Tax Comm'n, 434 U. S. 452, 473-474, nn. 25, 26 (1978). For scholarly discussions of the unitary business concept see G. Altman & F. Keesling, Allocation of Income in State Taxation 97-102 (2d ed. 1950); Dexter, Taxation of Income from Intangibles of Multistate-Multinational Corporations, 29 Vand L. Rev. 401 (1976); Hellerstein, Recent Developments in State Tax Apportionment, and the Circumscription of Unitary Business, 21 Nat. Tax J. 4S7, 496 (!968); Keeping & Warren, The Unitary Concept in the Allocation of Income, 12 Hastings L. J. 42 (1960); Rudolph, State Taxation of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups, 25 Tax L. Rev. 171 (1970).

¹⁵ In its reply brief, Mobil submits a new due process argument baaed on Vermont's failure to require “combined apportionment” which, while including the income of subsidiaries and affiliates as part of appellant's net income, would eliminate intercorporate transfers, such as appellant's dividend income, from that calculation. A necessary concomitant of this would be inclusion of the subsidiaries' and affiliates' sales, payroll, and property in the calculation of the apportionment formula. Reply Brief for Appellant 1-6. The result, presumably, would be advantageous to appellant, since virtually nothing would be added to the “Vermont” numerators of the apportionment factors, while there would be substantial increases in the “everywhere” denominators, resulting in a diminution of the apportionment fraction.

This argument appears to be an afterthought that was not presented to the Vermont tax authorities or to the courts of that State. The evidence in the record surely is inadequate to evaluate the effect of the proposal, its relative impact on appellant, or its potential implications. Moreover, the principal focus of this suggestion is the apportionment formula, not the apportionability of foreign source income. Appellant, we reiterate, took this appeal on the assumption that Vermont's apjwrtionment formula was fair. At this juncture and on these facts, we need not, and do not, decide whether comhined apportionment of this type is constitutionally required. In any event, we note that appellant's latter-day advocacy of this combined approach virtually concedes that income from foreign sources, produced by the operations of subsidiaries and affiliates, as a matter of due process is attributable to the parent and amenable to fair apportionment. That is all we decide today.

¹⁶ The dissent argues that unrelated business activity is “readily apparent” from the record because “a large number of the corporations … from which [Mobil] derived significant income would seem neither to be engaged in the petroleum business nor to have any connection whatsoever with Mobil's marketing business in Vermont.” Post, at 12 (emphasis added). The only evidence advanced in support of this assertion is a list of the names of corporations whose dividend payments are not at issue. See ante, n. 11. Furthermore, it may bear repeating that the burden of proof rests upon the appellant and not upon the Commissioner of Taxes. The absence of evidence in -the record to decide the issues on which the dissent speculates, post, at 12, cuts against and not in favor of appellant's cause.

¹ Moreover, in the last few sentences of n. 15, ante, at 15, the Court emphatically repeats that it has decided nothing more than that the Due Process Clause does not preclude the attribution of foreign source income to a parent and subjecting such income to fair apportionment. It states: “Appellant, we reiterate, took this appeal on the assumption that Vermont's apportionment formula was fair. At this juncture and on these facts, we need not, and do not, decide whether combined apportionment of this type is constitutionally required. In any event, we note that appellant's latter-day advocacy of this combined approach virtually concedes that income from foreign sources, produced by the operations of subsidiaries and affiliates, as a matter of due process is attributable to the parent and amenable to fair apportionment That is all we decide today.”

² Ante, at 9. See also ante, at 15-16:

“We do 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. We need not decide, however, whether Vermont's tax statute would reach extraterritorial values in an instance of that kind. Cf. Underwood Typewriter Co. v. Chamberlain, 254 U. S., at 121. Mobil has failed to sustain its burden of proving any unrelated business activity on the part of its subsidiaries and affiliates that would raise the question of nonapportionability.”

³ “In keeping with its litigation strategy, appellant has disclaimed any dispute with the accuracy or fairness of Vermont's apportionment formula. See Juris. Statement 10; Brief for Appellant 11. Instead, it claims that dividends from a ‘foreign source’ by their very nature are not apportionable income. This election to attack the tax base rather than the formula substantially narrows the issues before us. In deciding this appeal, we do not consider whether application of Vermont's formula produced a fair attribution of appellant's dividend income to that State,” Ante, at 8.

⁴ As we said in Moorman Mfg. Co. v. Bair, 437 U. S. 267, 272-273:

“The Due Process Clause places two restrictions on a State's power to tax income generated by the activities of an interstate business. First, no tax may be imposed unices there is some minimal connection between those activities and the taxing State. National Bellas Hess, Inc. v. Department of Revenue. 386 U. S. 753, 750. This requirement was plainly satisfied here. Second, the income attributed to the State for tax purposes must be rationally related to ‘values connected with the taxing State.’ Norfolk & Western R. Co. v. State Tax Comm'n, 390 U. S. 317, 325.”

See also Rudolph, State Taxation of Interstate Business: The Unitary Business Concept and Affiliated Corporate Groups, 25 Tax. L. Rev. 171, 181 (1970) (hereinafter State Taxation): ‘'The basic proposition can be simply stated: At least as far as nondomiciliary corporations are concerned, a state may only tax income arising from sources within the state. Or, put differently, it cannot give its income tax extraterritorial effect.”

To put it still differently, if. in a particular case, use of an allocation formula has the effect of taxing inr-ome earned by an interstate entity outside the State, it could alternatively be said to have the effect of taxing the income earned by that entity inside the State at a rate higher than that used for a comparable, wholly intrastate business, a discrimination that violates the Commerce Clause.

⁵ See, e. g., Keesling and Warren, The Unitary Concept In the Allocation of Income, 12 Hastings L. J. 42, 48 (1960): “In applying the foregoing definitions, it must be kept clearly in mind that although in particular instances all the activities of a given taxpayer may constitute a single business, in other instances the activities may be segregated or divided into a number of separate businesses. It is only where the activities within and without the state constitute inseparable parts of a single business that the classification of unitary should be used.”

⁶ In Butler Brothers, supra, the Court pointed out that no showing had been made that “income unconnected with the unitary business has been used in the formula,” 315 U. S., at 509. And in Moorman Mfg. Co., supra, we noted:

” ‘Interest, dividends, rents, and royalties (less related expenses) received in connection with business in the state, shall be allocated to the state, and where received in connection with business outside the state, shall be allocated outside of the state.’ Iowa Code § 422.33 (1) (a) (1977).

“In describing this section, the Iowa Supreme Court stated that ‘certain income, the geographical source of which is easily identifiable, is allocated to the appropriate state.’ 254 N. W. 2d 737, 739. Thus, for example, rental income would be attributed to the State and where the property was located. And in appellant's case, this section operated to exclude its investment income from the tax base. 437 U.S. 267, 269, n. 1. See also .State Taxation, supra n. 4, at 185.

⁷ Under this definition, Mobil computes its Vennont tax base for 1970 at approximately $23,000,000. On the basis of Vermont's three-factor formula; it computes Vermont's share of its total operating income as .146%, and it attributes the remaining 99.854% of the total to other locations. Using those figure, Mobile stated its Vermont taxable income to be approximtely §30-000, which, when multiplied by 6%, the applicable tax rate, produced a total tax liability for 1970 of Sl,821.67.

It Would seem that in defining the unitary business in this way, it would be open to Vermont to exclude the payroll and property connected with the management of Mobil's investment income from the denominator of the apportionment factor, which would effectively raise Vermont's share of Mobil's total operating income above the .146% figure. Thus, while I believe that the amount Vermont claims Mobil earned in the State is obviously excessive, it is also probably true that Mobil's Vermont earnings for 1970 are somewhat greater than the approximately $30,000 it computed.

⁸ 136 Vt, 545, 546, 394 A. 2d 1147, 1148 (1978).

⁹ & Vermont has treated Mobil's dividend income from the following corporations as part of the relevant unitary business:

Baltimore Gas & Electric

Bel ridge Oil Company

Bank of New York

Business Development Corporation of N. C.

Cincinnati Gas & Electric

Connecticut Gas & Power

Canner's Steam Company, Inc.

Continental Oil and Asphalt Company

Dallas Power & Light

Dayton Power & Light

Duke Power Company

Duquesne Light Company

Florida Power Corporation

General Royalties

Gulf States Utilities Company

Hartford Electric Light Company

Houston Lighting and Power Company

Illinois Power Company

Monongahela Power Company

Northern Indiana Public Service Company

Northern State Power Company

Pacific Gas and Electric Company

Pacific Lighting Corporation

Public Service Electric & Gas Company

Rochester Gas & Electric Company

San Diego Gas & Electric Company

Southern California Edison Company

Texas Electric Service Company

Texas Power & Light Company

Union Electric Company

United Illuminating Company

West Perm Power Company

Atlantic City Electric Company

Brooklyn Union Gas Company

Detroit Edison Company

Iowa-Illinois Gas & Electric Company

Indiana & Michigan Electric Company

Philadelphia Electric Company

Public Service Company of Colorado

New York Incorporated Corporation

See App. 77-78.

¹⁰ Mobil has only small minority interests in the corporations listed in footnote 9. It also received dividends in 1970 of over $115,000,000 from a 10% interest in the Arabian American Oil Company. By including Mobil's dividend income, some 8174,000,000 in 1970, in the apportionable tax base, and multiplying the apportionable tax base thus comprised by .146%, Vermont computed Mobil's 1970 tax liability to be $19,078.56.

¹¹ Because there is no necessary correlation between the levels of profitability of investment income making income, if more than meidental amounts of investment incline arc o-ed in an avenging formula intended to measure marketing income, inaceurvy s- sure to result.

¹² For the year 1970, appellant had dividend income of approximately $174,000,000 as compared with’ what it ralruletted apportionable income of approximately $23,000,000 This else is therefore comparable to the example given by Keesling & Warren in their article, The Unitary Concept in the Allocation of Income, 12 Hastings L. J. 42, 52-53 (1960):

“Example 1. A company with a commercial domicile in California, where its headquarters are located, is engaged in the operation of a system of railway lines throughout the western part of the United States. Over the years it has accumulated large reserves which are invested for the most part in stocks and bonds of other companies, from which it derives substantial income in the form of dividends and interest. The investment activities are carried on in the headquarters' office where the railroad operations are managed and controlled. Some individuals devote their entire time to the investment activities, whereas others, including a number of officers, devote part of their time to both the investment activities and the railroad operations.

“Although both activities are commonly owned and managed, and there is some common use of personnel and facilities, and although some practical difficulties may be experienced in segregating the expenses of the investment activities, clearly it would be wrong to consider that the company is engaged in only one business and that the entire income of the company should be apportioned within and without the state by means of a formula. Notwithstanding the common elements, here are two distinct series of income-producing activities. This conclusion follows from the fact that the income from dividends and interest can be identified as being derived from the stocks and bonds and the activities related thereto, and not in any way attributable to the general railroad operations carried on within and without the state. Since stocks and bonds and other intangibles are considered to have a location at the commercial domicile of the owner, and since all of the investment activities take place in California, the investment income should be computed separately and assigned entirely to California.

“The income from the railroad operations can likewise be identified as being derived from a distinct series of transactions, which should be considered as constituting a business separate and distinct from the investment activities. Since the railroad operations are carried on partly within and partly without the state, it is a unitary business and hence the income from the railway business as a whole should first be computed and apportion sd within and without California by means of an appropriate allocation formula.”

¹³ No one could seriously maintain that if a wealthy New York resident should open a gas station in Vermont, Vermont could use his dividends as a measure of the profitability of his gas station.

¹⁴ See n. 2, supra.

¹⁵ “Had appellant chosen to operate its foreign subsidiaries as separate divisions of a legally as well as a functionally integrated enterprise, there is little doubt that the income derived from those divisions would meet due process requirements for apportionability. Cf. General Motors Corp. v.Washington, 377 U, S. 436, 441 (1964). Transforming the same income into dividenda from legally separate entities works no change in the underlying economic realities of a unitary business, and accordingly it ought not to affect the apportionability of income the parent receives.”

¹⁶ “It seems clear, strictly as a logical proposition, that foreign source income is no different from any other income when it comas to determining, by formulary apportionment, the appropriate share of the income of a unitary business taxable by a particular state. This does not involve state taxation of foreign source income any more than does apportionment— in the case of a multistate business—involve the taxation of income arising in other states. In both situations the total income of the unitary business simply provides the starting point for computing the in-state income taxable by the particular state…

“Obviously, if the foreign source income is included in the base for apportionment, foreign property, payrolls and sales must be included in the apportionment fractions. This was recognized in Bass [. Ratclifl ct Gretton, Ltd. v. State Tax Commission, supra]… . “ State Taxation, supra, at 205.

¹⁷ See n. 9, supra.

¹⁸ A corporation's decision as to how much of its earnings to pay out in dividends is subject to many variables. Nothing says that 100% must be passed through to the .stockholders. A corporation is not a partnership. Indeed, depending on the state of the conjuration's finances, dividends could conceivably even exceed 100% of the earnings. In any event, at lea.-t for those corporations in which it has only a minority interest, Mobil cannot control the percentage of their earnings that is paid out in dividends.

¹⁹ See n 10. supra.

²⁰ The net result of the inclusion of the out-of-state investment income and the exclusion of the sales, payroll and property factors that produce that investment income is to increase Mobil's tax liability to Vermont for 1970 from the SI.821.67 computed by Mobil to $19,078,56.