FW Woolworth Co. v. Taxation and Revenue Dept. of NM
1982 U.S. LEXIS 47, 102 S. Ct. 3128, 458 U.S. 354 (1982)
Rule of Law:
The Due Process Clause prohibits a state from taxing a portion of a corporation's income, such as dividends or 'gross-up' amounts, derived from foreign subsidiaries unless those subsidiaries constitute a 'unitary business' with the parent corporation's activities within the taxing state, requiring functional integration, centralization of management, and economies of scale.
Facts:
- F. W. Woolworth Co. (Woolworth) is commercially domiciled in New York and engages in retail business through chains of stores located in the United States, Puerto Rico, and the Virgin Islands, including New Mexico.
- Woolworth owns four foreign subsidiaries: F. W. Woolworth GmbH (Germany), F. W. Woolworth, Ltd. (Canada), F. W. Woolworth, S. A. de C. V. Mexico (Mexico), and F. W. Woolworth Co., Ltd. (England).
- Woolworth wholly owns the German, Canadian, and Mexican subsidiaries, and holds a 52.7% interest in the English subsidiary; these subsidiaries also engage in chain-store retailing in their respective countries.
- During the fiscal year ending January 31, 1977, Woolworth received approximately $39.9 million in dividends from these four foreign subsidiaries.
- Woolworth calculated $25.5 million in 'gross-up' income for federal foreign tax credit purposes, which represents foreign taxes paid by subsidiaries and is 'deemed received' for federal tax calculation, but was not actual income received by Woolworth.
- The foreign subsidiaries operated autonomously and independently, making their own decisions regarding merchandise, site selection, advertising, accounting, personnel training, manufacturing, purchasing, warehousing, and financing.
- Woolworth maintained some managerial links, including common directors and approval for major financial decisions like dividend payments and substantial debt, but did not centrally manage or integrate operations with its foreign subsidiaries.
Procedural Posture:
- The New Mexico Taxation and Revenue Department audited F. W. Woolworth Co. and determined it should have included dividends from foreign subsidiaries and 'gross-up' figures in its apportionable New Mexico income.
- The Department denied Woolworth’s protest regarding the assessment.
- Woolworth appealed to the New Mexico Court of Appeals, which reversed the Department's decision, excluding the foreign dividends and 'gross-up' from apportionable income.
- The New Mexico Supreme Court reversed the Court of Appeals' decision, finding sufficient evidence of a unitary business and deeming the 'gross-up' figures properly included in Woolworth's apportionable New Mexico income.
Premium Content
Subscribe to Lexplug to view the complete brief
You're viewing a preview with Rule of Law, Facts, and Procedural Posture
Issue:
Does the Due Process Clause permit a state to tax a portion of dividends a parent corporation receives from foreign subsidiaries and 'gross-up' amounts (federal foreign tax credit calculation) if those subsidiaries operate as discrete business enterprises without functional integration or centralized management with the parent's in-state operations?
Opinions:
Majority - Justice Powell
No, the Due Process Clause does not permit New Mexico to tax the dividends or 'gross-up' amounts from Woolworth's foreign subsidiaries, because the evidence shows these subsidiaries operate as 'discrete business enterprises' lacking the necessary unitary business relationship with Woolworth's activities in New Mexico. The Court reiterated that the 'unitary-business principle' is the 'linchpin of apportionability' for state income taxation, requiring income attributed to a state to be rationally related to 'values connected with the taxing State.' Mere ownership or the potential for control, or the commingling of dividends with general funds, is insufficient to establish a unitary business. The proper inquiry focuses on 'functional integration, centralization of management, and economies of scale.' In this case, there was little functional integration; subsidiaries operated autonomously in key business functions like purchasing, manufacturing, warehousing, site selection, advertising, and accounting. Management was decentralized, with subsidiaries determining their own policies and inventory. While there were some common directors and parent approval for major financial decisions, this constituted 'occasional oversight' typical of an investment in a subsidiary, not actual integration. The 'gross-up' amounts, recognized as 'fictitious' and 'deemed received' solely for federal foreign tax credit purposes, are also beyond New Mexico's taxing power as they relate to foreign subsidiaries with no unitary business relationship to New Mexico. The tax thus attempts to reach 'extraterritorial values' unrelated to Woolworth's New Mexico business and fails to meet due process standards.
Dissenting - Justice O’Connor
Yes, the Due Process Clause permits New Mexico to tax these dividends because the subsidiaries, though operating somewhat autonomously, maintained frequent communication with the parent and required parent approval for major financial decisions, indicating they were not 'unrelated' or 'discrete business enterprises.' Justice O'Connor argued that the controlled subsidiaries, operating in geographically diverse markets in the same line of business as F. W. Woolworth Co., were not 'unrelated' or 'discrete business enterprises.' She highlighted the 'frequent' mail, telephone, and teletype communication between the upper echelons of management of the parent and the subsidiaries. Furthermore, decisions about major financial matters, such as dividend amounts and substantial debt, required parent approval, and Woolworth's financial statements were prepared on a consolidated basis. Based on these managerial links and shared business activities, she disagreed with the majority's redefinition of the limits of a unitary business, believing the facts established a sufficient connection for apportionment, and referenced her dissent in the companion case, ASARCO Inc. v. Idaho State Tax Comm’n.
Analysis:
This case significantly reinforces the strict interpretation of the 'unitary business principle' under the Due Process Clause, particularly concerning state taxation of dividends from foreign subsidiaries. It clarifies that mere ownership, potential for control, or the commingling of funds does not automatically create a unitary business. The decision provides a critical check on state taxing power, preventing states from taxing income from 'discrete business enterprises' that lack genuine operational and managerial integration with the in-state operations. This ruling emphasizes the need for actual functional integration, centralized management, and economies of scale to justify state apportionment of multi-corporate income.
