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Undoubtedly, the enterprise of a corporation which manufactures and sells its manufactured product is ordinarily a unitary business, and all the factors in that enterprise are essential to the realization of profits. When a state has adopted a method of income apportionment that is not intrinsically arbitrary, it will be sustained until proof is offered of an unreasonable and arbitrary application in particular cases. The fact that a corporate enterprise is a unitary one, in the sense that income is derived from the entire business, does not mean that for the purpose of taxation the activities which are conducted in different jurisdictions are to be regarded as component parts of a single unit so that the entire net income may be taxed in one State regardless of how much of it is derived from another state. A tax can be imposed upon a foreign corporation with respect to the proportionate part of its total net income which is attributable to the business carried on within the taxing state. When there are different taxing jurisdictions, each competent to lay a tax with respect to what lies within, and is done within, its own borders, and the question is one of apportionment, evidence may always be received which tends to show that a State has applied a method, which operates so as to reach profits which are in no just sense attributable to transactions within its jurisdiction.
The appellant, Hans Rees' Sons, Inc., a corporation organized under the laws of New York, began this action by an application to the Commissioner of Revenue of the State of North Carolina for the readjustment of the income tax assessed against the appellant by that State. The assessment was for the years 1923, 1924, 1925 and 1926, in accordance with the applicable state laws, and the controversy related to the proper allocation of income to the State of North Carolina. The Commissioner of Revenue made his findings of fact and conclusions of law, the appellant's exceptions were overruled and the prayer for revision of the taxes was disallowed. Appeal, waiving a jury, was taken to the Superior Court of Buncombe County, North Carolina. On the trial in that court, evidence was introduced by the appellant with respect to the course of business and the amount and sources of income for the years in question. Hans Rees' Sons admitted that "(a) in assessing the tax the Commissioner of Revenue followed the statutory method . . .; (b) that the valuation of the real estate and tangible property of the taxpayer 'both within and without the State' is correct; (c) that the total net income used as a basis for the calculation of the tax is correct; (d) that the allocation of the net income for purposes of taxation was in full accord with the statute." The contention of the appellant was that the income tax statute as applied to the appellant, upon the facts disclosed, was arbitrary and unreasonable, and was repugnant to the commerce clause and to section 1 of the Fourteenth Amendment of the Federal Constitution. The Superior Court struck out the testimony offered by Hans Rees' Sons, as being immaterial, and held that the statute, as applied did not violate constitutional rights. The judgment dismissing the action was affirmed by the Supreme Court of the State, 199 N. C. 42, 153 S. E. 850. The case comes here on appeal.
Was it an error to treat Hans Rees' Sons’ buying, manufacturing, and selling operations as part of a unitary business?
In reversing the supreme court's affirmation of the assessment and remanding the matter for further proceedings, the court found that it was error to treat Hans Rees' Sons’ buying, manufacturing, and selling operations as part of a unitary business. Regardless of the evidence, and upon the assumption made by the lower courts with respect to the presented facts, the statutory method operated unreasonably and arbitrarily in attributing to North Carolina a percentage of income out of all appropriate proportion to Hans Rees' Sons’ business transacted in that state. Accordingly, the Commissioner exceeded his authority in assessing the taxes.