Mobil Oil Corp. v. Commissioner of Taxes of Vt.
100 S. Ct. 1223, 445 U.S. 425, 1980 U.S. LEXIS 1292 (1980)
Rule of Law:
A nondomiciliary state may, consistent with the Due Process and Commerce Clauses, include a corporation's foreign-source dividend income in the apportionable tax base of its corporate income tax, provided the dividends are derived from a "unitary business" that includes the corporation's in-state activities and the apportionment formula is fair.
Facts:
- Mobil Oil Corporation, a New York corporation with its commercial domicile in New York City, engages in an integrated petroleum business globally, including exploration, production, refining, transportation, distribution, and sale of petroleum products.
- Mobil conducts much of its business abroad through wholly and partly owned subsidiaries and affiliates, many organized under foreign laws and some domestically incorporated in states other than Vermont.
- None of Mobil's subsidiaries or affiliates conduct business in Vermont, and Mobil's shareholdings in those corporations are controlled and managed from its New York City headquarters.
- In Vermont, Mobil's business activities are confined to wholesale and retail marketing of petroleum and related products, with no oil or gas production or refineries within the state.
- Mobil's Vermont business forms a small part of its worldwide enterprise, representing tiny portions of its total sales, payroll, and property.
- For the taxable years 1970, 1971, and 1972, Mobil received substantial dividend income from its subsidiaries and affiliates operating abroad.
- On its Vermont corporate income tax returns for these years, Mobil subtracted this foreign-source dividend income, regarding it as "nonapportionable" income.
Procedural Posture:
- Vermont imposed an annual net income tax on corporations doing business within the state, using a three-factor apportionment formula.
- For the taxable years 1970-1972, the Vermont Department of Taxes recalculated Mobil Oil Corporation's income by restoring its foreign-source dividend income to the preapportionment tax base, assessing deficiencies and interest.
- Mobil Oil Corporation challenged these assessments before the Commissioner of Taxes, arguing violations of the Due Process and Commerce Clauses, and an unfair apportionment under state law.
- The Commissioner of Taxes upheld the inclusion of dividend income, rejecting Mobil Oil Corporation's arguments.
- Mobil Oil Corporation sought review by the Superior Court of Washington County, which reversed the Commissioner's ruling, concluding that inclusion of dividend income was unconstitutional and that it should be subtracted from the tax base.
- The Commissioner of Taxes appealed to the Supreme Court of Vermont.
- The Supreme Court of Vermont reversed the Superior Court's judgment, finding no constitutional defect and remanding for reinstatement of the deficiency assessments.
- The Supreme Court of the United States noted probable jurisdiction.
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Issue:
Does the Due Process Clause of the Fourteenth Amendment or the Commerce Clause of Article I, Section 8, preclude a nondomiciliary state from including a multistate and multinational corporation's foreign-source dividend income in the apportionable tax base of its corporate income tax, where the dividend income is derived from a unitary business that includes the corporation's in-state activities?
Opinions:
Majority - Mr. Justice Blackmun
No, a nondomiciliary state is not precluded from taxing a proportionate share of a corporation's foreign-source dividend income if that income is derived from a unitary business that includes the corporation's in-state activities. The Court reaffirmed that the "linchpin of apportionability" in state income taxation is the unitary-business principle, which allows states to tax income generated by interstate or international commerce so long as the intrastate and extrastate activities form part of a single unitary business. Mobil failed to demonstrate that its foreign operations were distinct in a business or economic sense from its petroleum sales activities in Vermont; indeed, the record indicates these activities are part of an integrated petroleum enterprise. The Court rejected the argument that dividend income should be treated differently from operating income, stating that one must look at the underlying activity, not the form of investment or legal separation, to determine apportionability. It found no constitutional preference for allocating dividend income to a single commercial domicile over apportionment among states, distinguishing property tax allocation rules from income tax apportionment. Regarding the Commerce Clause, the Court noted that actual multiple taxation had not been demonstrated and rejected the argument that foreign-source dividends require allocation to a single situs due to the risk of foreign taxation, stating the standard for identifying impermissible discrimination should not differ for foreign commerce. Federal tax policy and statutes were deemed irrelevant as they concern international, not interstate, multiple taxation.
Dissenting - Mr. Justice Stevens
No, Mobil's foreign-source dividend income should not be included in Vermont's apportionable tax base under the circumstances, because the record either shows that Mobil's investment income and its Vermont operating income are not part of the same unitary business, or that Vermont's apportionment formula was applied in an arbitrary and unconstitutional way. Justice Stevens argued that the justification for apportionment formulas – the impossibility of precisely allocating in-state profits – is inapplicable to out-of-state earnings from sources unconnected to the business conducted within the state. He posited that Mobil's investment income was distinct from its petroleum marketing business in Vermont. He contended that if a broad definition of Mobil's unitary business (including dividends) was used, Vermont's apportionment formula was unfairly applied because it included the dividend income in the tax base but did not include the payroll, sales, or property of the dividend-paying corporations in the denominator of the apportionment formula, which would inevitably overstate Mobil's Vermont income. He also argued that Mobil did not waive these objections, despite its general disclaimer regarding the 'method' of apportionment, because challenging the inclusion of income in the tax base necessarily challenges the fairness of the resulting tax calculation.
Analysis:
This landmark decision significantly enhanced states' power to tax multinational corporations, solidifying the application of the unitary business principle to complex global enterprises. It affirmed that the legal form of an entity (subsidiary vs. division) does not necessarily break the unitary nature of a business for state income tax apportionment purposes. The ruling also limited the precedential scope of Japan Line, Ltd. to property taxes, clarifying that the concerns about international multiple taxation in that case do not automatically extend to state income taxation of foreign-source dividends. Ultimately, the case places a substantial burden on taxpayers to demonstrate that income-generating activities are truly unrelated to the in-state business or that an apportionment formula is fundamentally unfair.
