ASARCO Inc. v. Idaho State Tax Commission
1982 U.S. LEXIS 46, 458 U.S. 307, 102 S. Ct. 3103 (1982)
Rule of Law:
Under the Due Process Clause, a state may not tax a nondomiciliary parent corporation's intangible income (dividends, interest, capital gains) from subsidiary corporations unless the intangible property and the income-paying subsidiaries form part of a "unitary business" with the parent corporation's activities in the taxing state, demonstrating functional integration, centralization of management, and economies of scale.
Facts:
- ASARCO Inc. (ASARCO) is a New Jersey-incorporated corporation with headquarters in New York, that mines, smelts, and refines nonferrous metals in various states.
- Approximately 2.5% of ASARCO's total business activities, including the operation of a silver mine and an administrative office, take place in Idaho.
- During 1968-1970, ASARCO received dividends, interest, and capital gains from five corporations: M. I. M. Holdings, Ltd., General Cable Corp., Revere Copper and Brass, Inc., ASARCO Mexicana, S. A., and Southern Peru Copper Corp.
- ASARCO held majority interests in M. I. M. (52.7%) and Southern Peru (51.5%), and minority interests in General Cable (34%), Revere (34%), and Mexicana (49% after divestment).
- The five corporations primarily operate in the nonferrous metals industry; for example, Southern Peru produced smelted but unrefined copper in Peru and sold about 35% of its output to ASARCO at prices determined by reference to average representative trade prices.
- ASARCO had a management agreement with Southern Peru, allowing it to appoint 6 of 13 directors, but requiring 8 votes for resolutions and unanimous consent for bylaw changes, effectively preventing ASARCO's unilateral control.
- M. I. M. operated entirely independently of ASARCO, with ASARCO not electing board members or participating in officer selection.
- General Cable and Revere Copper management did not seek direction or approval from ASARCO, partly due to a 1967 Department of Justice antitrust decree that prohibited ASARCO from maintaining common officers, voting its stock, or acquiring stock in other copper fabricators, and led to divestment of General Cable stock in 1970.
Procedural Posture:
- The Idaho State Tax Commission sought to levy corporate income taxes on ASARCO for 1968, 1969, and 1970.
- In 1971, the Multistate Tax Commission audited ASARCO's returns, recommending unitizing ASARCO with six wholly-owned subsidiaries (which was not disputed by ASARCO) and classifying dividends, interest, and capital gains from five other, less-than-wholly-owned subsidiaries as "business income" subject to apportionment.
- The Idaho State Tax Commission adopted the auditor's adjustments, assessing tax deficiencies against ASARCO.
- ASARCO petitioned for review in the State District Court, which upheld the Commission's unitized treatment of the six wholly-owned subsidiaries but overruled the Commission’s determination that the disputed dividends, interest, and capital gains constituted "business income."
- The Idaho State Tax Commission, but not ASARCO, appealed to the Idaho Supreme Court, which held that the trial court had erred and that ASARCO’s receipt of dividends, interest, and capital gains from the five corporations constituted apportionable "business" income, and that this tax treatment withstood attack under the Commerce and Due Process Clauses.
- The U.S. Supreme Court vacated and remanded the case for reconsideration in light of its decision in Mobil Oil Corp. v. Commissioner of Taxes of Vermont.
- The Idaho Supreme Court reinstated its previous opinion in a brief per curiam order.
- The U.S. Supreme Court noted probable jurisdiction.
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Issue:
Does the Due Process Clause permit a nondomiciliary state to include within the taxable income of a parent corporation doing some business in the state a portion of intangible income, such as dividends, interest payments, and capital gains from the sale of stock, that the parent receives from subsidiary corporations that do not form a "unitary business" with the parent's in-state activities?
Opinions:
Majority - Justice Powell
No. The Due Process Clause does not permit a nondomiciliary state to include such intangible income from subsidiary corporations within the taxable income of a parent corporation unless those subsidiaries form a "unitary business" with the parent's operations in the taxing state. Justice Powell explained that the unitary business principle, established in cases like Mobil Oil Corp. v. Commissioner of Taxes of Vermont and Exxon Corp. v. Wisconsin Dept. of Revenue, requires a "minimal connection" between interstate activities and the taxing state, and a "rational relationship" between income attributed to the state and the in-state values of the enterprise. This relationship is satisfied only when the in-state and out-of-state activities are part of a single unitary business characterized by "functional integration, centralization of management, and economies of scale." The Court found that ASARCO failed to show a unitary business relationship with the five dividend-paying subsidiaries. Despite ASARCO's majority interest in Southern Peru, a management agreement prevented ASARCO from controlling it. M. I. M. operated entirely independently, with ASARCO not exercising its potential control. General Cable and Revere Copper were minority interests, and an antitrust decree limited ASARCO's influence. Mexicana also operated independently. The Court rejected Idaho's proposed "corporate purpose" definition of a unitary business, stating it would destroy the concept by making every investment "related" to the business, and thus no limitation at all. Therefore, taxing this income would be "a mere effort to reach profits earned elsewhere" in violation of due process. The Court also held that interest and capital gains income from these subsidiaries should be treated the same as dividend income, looking at the underlying economic realities rather than the form of investment.
Dissenting - Justice O’Connor
Yes. The Due Process Clause permits a nondomiciliary state to tax a proportionate share of the investment income of a nondomiciliary corporation doing business within its borders, as the taxpayer failed to demonstrate that the investments were not part of its unitary nonferrous metals business. Justice O'Connor, joined by Justice Blackmun and Justice Rehnquist, argued that ASARCO did not meet its burden of showing by "clear and cogent evidence" that its investments were "discrete business enterprises." First, ASARCO's investment decisions in other nonferrous metals companies likely leveraged its existing expertise and knowledge of the industry, making the investment decision-making integrated with its primary business. Second, ASARCO failed to prove its investments were separate from its management of financial requirements, as they could be interim uses of accumulated long-term funds, functionally related to the business, similar to short-term working capital investments that ASARCO conceded were taxable. Third, ASARCO had effective operational control of at least M. I. M., Southern Peru, and Mexicana, providing business advantages like "profits stability" and "assured supply" (e.g., Southern Peru selling 35% of its output to ASARCO), even if ASARCO did not actively assert day-to-day control. The dissent criticized the majority for replacing a multifaceted analysis with an "oversimplified test of active operational control," thereby "shrinking the concept beyond all recognition." It also expressed concern that relying on the Due Process Clause could preclude congressional action to rationalize state taxation of interstate commerce, unlike a Commerce Clause ruling.
Concurring - Chief Justice Burger
Chief Justice Burger concurred. Chief Justice Burger joined the Court's opinion based on the explicit statement that the Court's holding does not prevent future congressional action in this area.
Analysis:
This case significantly clarified and reinforced the "unitary business" principle as a stringent due process limitation on a state's power to tax a nondomiciliary corporation's intangible income. It established that mere ownership or potential control, absent actual functional integration, centralization of management, or economies of scale between the parent and subsidiary, is insufficient to justify apportionment. The decision requires states to demonstrate a real-world connection beyond passive investment, thereby limiting states' ability to cast a wide net over a corporation's global income, especially from investment-type assets. Future cases would need to carefully examine the operational and economic realities of the relationship between parent and subsidiaries, making it harder for states to include income from less-than-wholly-owned or autonomously managed entities.
