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Container Corp. of Am. v. Franchise Tax Bd. - 463 U.S. 159, 103 S. Ct. 2933 (1983)


Having determined that a certain set of activities constitute a unitary business, a state must then apply a formula apportioning the income of that business within and without the state. Such an apportionment formula must, under both the Due Process and Commerce Clauses, be fair. The first, and again obvious, component of fairness in an apportionment formula is what might be called internal consistency, the formula must be such that, if applied by every jurisdiction, it would result in no more than all of the unitary business' income being taxed. The second and more difficult requirement is what might be called external consistency, the factor or factors used in the apportionment formula must actually reflect a reasonable sense of how income is generated. The Constitution does not invalidate an apportionment formula whenever it may result in taxation of some income that did not have its source in the taxing state.


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 the total unapportioned taxable income of its unitary business, appellant included its own corporate net earnings as derived from its federal tax form, but did not include any income of its subsidiaries. In calculating the share of its net income which 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.


Was it proper to apply the "unitary business" principle and formula apportionment in corporate franchise tax apportionment for corporations doing business both inside and outside the State?




The Supreme Court of the United States affirmed. The Court concluded that based upon the corporation's assistance to its subsidiaries and loans to them, the application of the unitary business principle to the corporation was proper. Furthermore, the formula applied would result in no more than all of the unitary business' income being taxed if applied by every jurisdiction, and the formula actually reflected a reasonable sense of how income was generated. The formula therefore did not violate the constitutional requirement of fair apportionment. Finally, the adoption of the formula in the context of international business and trade was not impermissible because the tax issue was not preempted by federal law.

As for the applicable standards of review, the Court first set forth the general rule that a taxpayer claiming immunity from a tax has the burden of establishing his exemption. Next, the as to the question of fair apportionment, the Court explained that appellant has the burden of proof; it must demonstrate that there is no rational relationship between the income attributed to the State and the intrastate values of the enterprise.

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